A 10-year $1,000 bond sells for $980, and the flotation costs are 2% of the par value. The coupon rate is 8%. Put in the values of the variables and calculate the before-tax cost of capital from this bond?
Coupon dollars (I) =
Flotation costs in dollars (FC) =
term (n) =
Price (P) =
Net proceeds (N_p) =
rd = %
As the question is silent, on whether the bond pays annual or semi-annual coupons, |
we shall calculate for both cases . |
Before-tax cost of the bond= |
Net proceeds=(( $ Coupon)*(1-(1+r)^-n)/r)+(FV/(1+r)^n) |
Where, |
Net proceeds= Selling price-Flotation cost,ie. 980-(1000*2%)= 960 |
Coupon amt.= (1000*8%)= $ 80 , if annual or 80/2= $ 40 ,if semi-annual coupon |
n= no.of coupon periods, ie. 10 for annual & 10*2= 20 for semi-annual coupon bonds |
So, substituting the values, |
For annual coupon bonds |
960=(80*(1-(1+r)^-10)/r)+(1000/(1+r)^10 |
Solving for r, we get the annual before-tax cost, r as: |
8.61% |
For semi-annual coupon bonds |
960=(40*(1-(1+r)^-20)/r)+(1000/(1+r)^20 |
Solving for r, we get the annual before-tax semi-annual cost, r as: |
4.3023% |
Converting, |
The annual before tax cost = |
(1+4.3023%)^2-1= |
8.79% |
Before-tax cost of capital of this bond is its yield that equals the present net proceeds , to the present value of its future--- coupon +principal-at-maturity -- cash flows |
Coupons | ||
Annual | Semi-annual | |
Coupon dollars (I) =1000*8%= | 80 | 40 |
Flotation costs in dollars (FC) =(1000*2%) = | 20 | 20 |
term (n) = 10 | 10 | 10 |
Price (P) = 980 | 980 | 980 |
Net proceeds (N_p) = 980-20= | 960 | 960 |
rd = % semi-annual | 4.30% | |
Annual | 8.61% | 8.79% |
A 10-year $1,000 bond sells for $980, and the flotation costs are 2% of the par...
A 10-year $1,000 bond sells for $980, and the flotation costs are 2% of the par value. The coupon rate is 8%. Put in the values of the variables and calculate the before-tax cost of capital from this bond? Coupon dollars (1) = Flotation costs in dollars (FC) = term (n) = Price (P) = Net proceeds (N_p) = Pa=
Click to see additional instructions A 10-year $1,000 bond sells for $980, and the flotation costs are 2% of the par value. The coupon rate is 8%. Put in the values of the variables and calculate the before-tax cost of capital from this bond? Coupon dollars (1) = Flotation costs in dollars (FC) = term (n) = O Price (P) - Net proceeds (N_p) =
Click to see additional instructions A 10-year $1,000 bond sells for $980, and the flotation costs are 2 % of the par value. The coupon rate is 8%. Put in the values of the variables and calculate the before-tax cost of capital from this bond? Coupon dollars (I) Flotation costs in dollars (FC) = term (n) Price (P) Net proceeds (N p) = % = PJ
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