5. A firm is issuing new debt to finance a capital investment project. The firm will...
5. A firm is issuing new debt to finance a capital investment project. The firm will issue 15,550 new bonds with a $1,000 face value that will mature in 10 years. The bonds will pay a $35 semiannual coupon, and similar bonds are currently priced at 95% of par. The associated flotation costs are expected to be $15 per bond. Further, the company has a marginal tax rate of 34%. Given this information, what is the before-tax cost of debt?
A)6.85%
B)3.98%
C)9.54%
D)8.15%
E)7.96%
Homework Answers
Answer = E) 7.96
Explanation:
FV = -1000 PMT = -35 PV = 950-15 = 935, N = 10×2 = 20
I/Y = RATE(nper,pmt,pv,fv)
compute I/Y = 3.9772 × 2 = 7.955%
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