A company is going to issue a $1,000 par value bond which pays 8% in a

QUESTION

A company is going to issue a $1,000 par value bond which pays 8% in annual interest. The company expects investors to pay $910 for the 20-year bond. The expected flotation cost per bond is $42. What is the firms cost of debt in this example? (Assume a 34% tax rate.)
Face value = $1000 Coupon payment = PMT = $1000 * 0.08 = $80 nper = 20 years present value =current value floation cost = $910 $42 = $868 In MS-Excel use rate function =rate(nper,pmt,pv,fv)

e(20,80,-868,1000) = 9.50% Yield to maturity = 9.50% Cost of debt after tax = cost of debt(1-tax) cost of debt = 9.50(1-0.34) = 6.3%

ANSWER:

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