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P11-2 answers - P11-2 Cost of debt using both methods...

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the bond. (Pg 552) c. Use the IRR approach to calculate the before-tax and after-tax costs of debt. * (excel formula on Pg 447) * (work Pg 553 & 554) approach do you prefer? Why? T CF 0 \$980 1–15 -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 bond’s maturity Nd= \$980 Pv= 1000 I= 120 T= %40 P11-2 Cost of debt using both methods Currently, Warren Industries can sell 15-year, \$1,000-par-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 firm’s point of view over the maturity of .d. Use the approximation formula to estimate the before-tax and after-tax costs of debt. e. Compare and contrast the costs of debt calculated in parts c and d. Which

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Flotation costs = \$30.00 Selling of the Bond = \$1,010.00

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P11-2 answers - P11-2 Cost of debt using both methods...

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