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FIN-504 MODULE 5 HW

# FIN-504 MODULE 5 HW - FIN 504 Finance Principals Gerald...

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FIN 504 - Finance Principals Gerald McGill Grand Canyon University Module Five - Capital and Dividends P11-2 (575) Warren Industries 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) \$1,010 - \$30 Net Proceeds = \$980 B) End of Years Cash Flow 0 \$980 1-15 (\$120) 15 (\$1,000) C) Use the IRR approach to calculate before-tax and after-tax costs of debt Net proceeds from sale of bond PV = \$980 Coupon payment PMT = (\$120) Years to maturity N = 15 Par value (principal) FV = \$1,000 Before-tax cost of debt = 12.298% D) Use the approximation formula to estimate the before-tax and after-tax costs of debt Before-tax cost of debt = \$120+(\$1000-\$980)/15 = 121.33 (\$980+\$1000)/2 = 990 Before-tax cost of debt = 12.255% E) Compare and contrast the costs of debt calculated in parts c and d. Which approach do you prefer? W I prefer using the internal rate of return (IRR) due to its more accurate answer and also because using

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