6. A corporate bond has a face value of $1,000 and a coupon rate of 5%

QUESTION

6. A corporate bond has a face value of $1,000 and a coupon rate of 5%. The bond matures in 15 years and has a current market price of $925. If the corporation sells more bonds it will incur flotation costs of $25 per bond. If the corporate tax rate is 35%, what is the after-tax cost of debt capital
Answer: Floatation cost = $25 Market pice after Floataton cost = 925 25 = $900 Par Value = $1000 Coupon = $50 Number of years = 15 900 = 50/(1+YTM)^1 + 50/(1+YTM)^2 +

(1000+50)/(1+YTM)^15 Solving for YTM, we get 6.03% After-tax cost of debt = 6.03% * (1-0.35) = 3.92%

ANSWER:

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