Belton is issuing a $1,000 par value bond that pays 7 percent annual interest

QUESTION

Belton is issuing a $1,000 par value bond that pays 7 percent annual interest and matures in 15 years. Investors are willing to pay $958 for the bond. Flotation costs will be 11 percent of market value. The company is an 18 percent tax bracket. What will be the firm’s after-tax cost of debt on the bond?

ANSWER

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