Question

Costly Corporation plans a new issue of bonds with a par value of $1000, a maturity of 37 years, and an annual coupon rate of 11.0%. Flotation costs associated with a new debt issue would equal 3.0% of the market value of the bonds. Currently, the appropriate discount rate for bonds of firms similar to Costly is 9.0%. The firm's marginal tax rate is 50%. What will the firm's true cost of debt be for this new bond issue

Answer 1

Answer: hello the options related to your question is missing attached below are the missing options

answer : 4.65% ( option 3 )

Explanation:

par value of bond = $1000

Maturity period = 37 years

Annual coupon rate = 11.0%

Floating costs = 3.0% of market value of bonds

Discount rate for bonds of firms similar = 9.0 %

Marginal tax rate = 50%

Determine the firm's true cost of debt

Nper = 37

coupon rate = 11.0%

PMT = face value * coupon rate = 1000 * 11%  = $110

present value ( PV ) = $1,176.67

step 2 ; calculate the value of YTM

YTM = 9.29%  using excel function: rate( 37, 110, -1176.67, 1000 )

step 3 : calculate True cost of debt

YTM * ( 1 - marginal tax rate )

= 9.29% * ( 1 - 0.5 )

= 4.65%