Question

The cost of debt Gronseth Drywall Systems, Inc., is in discussions with its investment bankers regarding the issuance of new bonds. The investment banker has informed the firm that different maturities will carry different coupon rates and sell at different prices. The firm must choose among several alternatives. In each case, the bonds will have a $1,000 par value and flotation costs will be $40 per bond. The company is taxed at 22%. Use the approximation formula to calculate the after-tax cost of financing with the following alternative. (Click on the icon located on the top-right corner of the data table below in order to copy its contents into a spreadsheet.) will be 540 per bond. The com Coupon rate 8% Time to maturity 20 years Premium or discount -$290 The after-tax cost of financing using the approximation formula is %. (Round to two decimal places.)

Answer 1

Price of Bond = 1,000 - 290 - 40 = $670

Using Approximation Formula,

YTM = [80 + (1,000 - 670)/20]/[(1,670)/2]

YTM = 11.56%

After-tax cost of Debt = (1 - 0.22)(0.1156)

After-tax cost of Debt = 9.02%