Question

Suppose a company will issue new 20-year debt with a par value of $1,000 and a coupon rate of 9%, paid annually. The tax rate is 35%. If the flotation cost is 5% ofthe issue proceeds, then what is the after-tax cost of debt? Disregard the tax shield from the amortization of flotation costs. Round your answer to two decimalplaces.

Answer 1

Interest per year = 1000X 9% = 90
Interest for 20 years =90 X 20years= 1800
Interest cost after tax = 1800 X (1-.35)= 1170
Floatation cost= 1000X 5% =50
Total cost = 1170 +50=1220

Answer 2

Interest per year	= 1000*9%
	90
Total interest for 20 years = (90*20years)	1800
Interest cost after tax	= 1800*(1-.35)
	1170
Floatation cost = 1000*5% =	50
Therefore, total cost	1220

Answer 3

Suppose a company will issue new 20-year debt with a par value of $1,000 and a coupon rate of 9%, paid annually. The tax rate is 35%. If the flotationcost is 5% of the issue proceeds, then what is the after-tax cost of debt? Disregard the tax shield from the amortization of flotation costs

Interest per year = 1000X 9% = 90
interest for 20 years = 90 X 20years= 1800
Interest cost after tax = 1800 X (1-.35) = 1170
Floatation cost = 1000X 5% =50
total cost= 1170 +50 =1220

Answer 4

Suppose a company will issue new 20-year debt with a par value of $1,000and a coupon rate of 9%, paid annually. The tax rate is 35%.If the flotation cost is 5% of the issue proceeds, then what is the after-tax cost of debt? Disregard the tax shield from the amortization of flotationcosts

Interest per year= 1000X 9% = 90

interest for 20 years =90 X 20years= 1800

Interest cost after tax= 1800 X (1-.35)= 1170

Floatation cost = 1000X 5% =50

total cost= 1170 +50 =1220