Question

​(Cost of debt​) Carraway Seed Company is issuing a ​$1000 par value bond that pays 7 percent annual interest and matures in 12 years. Investors are willing to pay ​$955 for the bond. Flotation costs will be 13 percent of market value. The company is in a 20 percent tax bracket. What will be the​ firm's after-tax cost of debt on the​ bond? The​ firm's after-tax cost of debt on the bond will be ​% ​(Round to two decimal​ places.)

Answer 1

Solution Step 1 : Calculate net proceed from sale of Bond Particulars Sale Price Less: Flotation cost (955 X 13%) Net Proceed Amount 955 124.15 830.85 Step 2 : Calculate after tax cost of Debt Interest Payment (1000 X 7%) Less: Tax Saving (70 X 20%) Net Cost After tax cost of debt Net Cost Net Proceed 56 830.85 6.74% Hence, after tax cost of debt is 6.74%