First Blank - the floatation costs will be deducted/ reduced from the proceeds
Coupon rate = $85/$1000 = 8.5%
After-tax cost of debt without flotation cost
Kd = Coupon Rate x (1-tax rate)
Kd = 8.5% x (1-0.4)
Kd = 5.16%
After-tax cost of debt with flotation cost
$1000 x (1-0.01) = $85 / (1+rd)t + $85 / (1+rd)2 + $85 / (1+rd)3 + $85 / (1+rd)4 ...... + $1085 / (1+rd)15
$990 = $85 / (1+rd)t + $85 / (1+rd)2 + $85 / (1+rd)3 + $85 / (1+rd)4 ...... + $1085 / (1+rd)15
By using IRR; We get
rd = 8.621%
Hence, Kd would be:
Kd = rd x (1-tax rate)
= 8.621 x (1-.4)
= 5.173 %
Blank 3 - This is the cost of Additional/ Marginal debt, and it is different from..
What do lenders require, and what kind of debt costs the company? that is relevant when...
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The required return (or cost) of previously issued debt is often referred to as the projected rate. It usually differs from the cost of newly raised financial capital. Consider the case of Peaceful Book Binding Company: Peaceful Book Binding Company is considering issuing a new twenty-five-year debt issue that would pay an annual coupon payment of $75. Each bond in the issue would carry a $1,000 par value and would be expected to be sold for a market price equal...
The cost of debt that is relevant when companies are evaluating new investment projects is the marginal cost of the new debt to be raised to finance the new project. Consider the case of Purple Lemon Fruit Company (Purple Lemon): Purple Lemon Fruit Company is considering issuing a new 15-year debt issue that would pay an annual coupon payment of $75. Each bond in the issue would carry a $1,000 par value and would be expected to be sold for...
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What do lenders require, and what kind of debt costs the company? The cost of debt that is relevant when companies are evaluating new investment projects is the marginal cost of the new debt that is to be raised to finance the new project. Consider the case of Happy Lion Manufacturing Inc.: Happy Lion Manufacturing Inc. can issue a 30-year debt security that pays an annual coupon payment of $80. The bond...
Consider the case of Peaceful Book Binding Company The CFO of Peaceful Book Binding Company is trying to determine the company’s WACC. He has determined that the company’s before-tax cost of debt is 9.60%. The company currently has $750,000 of debt, and the CFO believes that the book value of the company’s debt is a good approximation for the market value of the company’s debt. • The firm’s cost of preferred stock is 10.70%, and the book value of preferred...
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4. The calculation of the cost of preferred stock Aa Aa Firms that carry preferred stock in their capital mix want to not only distribute dividends to common stockholders but also maintain credibility in the capital markets so that they can raise additional funds in the future and avoid potential corporate raids from preferred stockholders. Consider the case of Peaceful Book Binding Company: Ten years ago, Peaceful Book Binding Company issued a perpetual preferred stock issue-called PS Alpha-that pays a...