Question

Currently, Warren Industries can sell 15-year​, ​$1,000​-par-value bonds paying annual interest at a 12​% coupon rate. Because current market rates for similar bonds are just under 12​%, Warren can sell its bonds for ​$1 comma 050 ​each; Warren will incur flotation costs of ​$20 per bond. The firm is in the 22​% tax bracket.A. CalCulate the bond's yield to maturity (YTM) to estimate the before-tax and after- tax cost of debt.
B. Use the approximation formula to estimate the before-tax and after-tax costs of debt.

Answer 1

Answer:

11.57% and 9.02%

Explanation:

For computing the before-tax and after- tax cost of debt we use the RATE formula i.e to be shown in the attachment below:

Given that,  

Present value = $1,050 - $20 = $1,030

Future value or Face value = $1,000  

PMT = 1,000 × 12% = $120

NPER = 15 years

The formula is shown below:  

= Rate(NPER;PMT;-PV;FV;type)  

The present value come in negative  

So, after solving this,  

1. The pretax cost of debt is 11.57%

2. And, the after tax cost of debt would be

= Pretax cost of debt × ( 1 - tax rate)

= 11.57% × ( 1 - 0.22)

= 9.02%