Question

Lee Airlines plans to issue 12-year bonds with a par value of $1,000 that will pay $70 every six months. The bonds have a market price of $960. Flotation costs on new debt will be 7%. If the firm is in the 35% marginal tax bracket, what is the posttax cost of new debt

Answer 1

Answer:

After tax cost of debt = 10.43%

Explanation:

Market price = 960

Flotation cost = 0.07

Market price after Flotation cost = 960*(1-0.07) = 960*0.93 = 892.8

Face value = 1,000

Interest payment (PMT) = 1000*0.07 = 70

Term of payment = 12*2 = 24

Cost of debt before tax = Rate(24, 70, -892.8, 1000, 0)*2

Cost of debt before tax = 0.080198497*2

Cost of debt before tax = 0.160396994

Cost of debt before tax = 16.04%

Tax rate = 35%

After tax cost of debt = 16.04% * (1-35%)

After tax cost of debt = 0.1604*0.65

After tax cost of debt = 0.10426

After tax cost of debt = 10.43%