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Unformatted text preview: the bond. (Pg 552) * (excel formula on Pg 447) * (work Pg 553 & 554) approach do you prefer? Why? T CF P112 Cost of debt using both methods Currently, Warren Industries can sell 15year, $1,000par value bonds paying annual interest at a 12% coupon rate. As a result of current interest rates, the bonds can be sold for $1,010 each; flotation costs of $30 per bond will be incurred in this process. The firm is in the 40% tax bracket. A. Find the net proceeds from sale of the bond, N d . (Pg 550) B. Show the cash flows from the firms point of view over the maturity of C . Use the IRR approach to calculate the beforetax and aftertax costs of debt. D . Use the approximation formula to estimate the beforetax and aftertax costs of debt. E. Compare and contrast the costs of debt calculated in parts c and d. Which 0 $980 115 120 15 1,000 I= annual interest in dollars(coupon interest rate x par value) Nd=net proceeds from the sale of debt (bond) n=number of years to the bonds maturity Nd= $980 Pv= 1000 I= 120 T= %40 Flotation costs = $30.00 Selling of the Bond = $1,010.00 The net proceeds to the firm from the sale of each bonds= T CF $980 I= annual interest in dollars(cou 115120 Nd=net proceeds from the sale 151,000 n=number of years to the bond Nd= $980 Pv= 1000 See Below rd ri 12.00% 7.00% I= annual interest in dollars(cou Nd=net proceeds from the sale n=number of years to the bond Nd= $980 Pv= 1000 The IRR approach in nature from what we learn in the textbook is very detailed an There fore I will trust the IRR as oppose to the approxiamation firgure Calculation fo Year Bond Price Interest Before tax Cash Flow 980...
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 Spring '11
 Harper&Tai

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