Fin9770BrighamCh09NA14-32.pptx - Example Cost of Debt for bond selling at par(i.e face value •Prescott Corporation issues a $1,000 par 20 year bond

Fin9770BrighamCh09NA14-32.pptx - Example Cost of Debt for...

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Example: Cost of Debt for bond selling at par (i.e. face value) Prescott Corporation issues a $1,000 par , 20 year bond paying the market rate of 10%. Coupons are semiannual. The bond sells at par since it pays the market rate. Tax rate= .34 r d = after tax cost of debt For par bond no floatation cost r d-before tax = YTM =10% r d = (1-taxRate) x r d-before tax = (1-.34)10%=6.6%
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Cost of debt for non par bond . A 15 year $1000, 9% bond with semi-annual coupon is issued at=$923.14 tax rate=.34 r d-before-tax = IYR x M (IYR is periodic coupon interest rate) M=coupon payments per year N=2 x 15=30 PV=923.14 PMT= - 9%x1000/2=- 45 FV= -1000 IYR=? =5% r d before tax = 5% x 2 = 10% r d = 10%(1-.34)=6.6% (see Mindtap prob 9-9) Slide show
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Suppose a $1000 11% bond has issue price=$1037.91 no floatation cost , maturity in 5 yrs, tax rate = 25%, the after tax cost of debt= ? 1. 6.5% 2. 7.0% 3. 7.5% 4. 8.0%
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Floatation costs Extra cost for external financing Amount paid to raise capital Fees to investment bankers (underwriters) Legal fees Registration fees
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Example: Cost of Debt with floatation costs for par bond Prescott Corporation issues a $1,000 par, 20 year bond paying the market rate of 10%. Coupons are semiannual. The bond will sell for par since it pays the market rate, but flotation costs amount to $45 per bond.
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