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Time Remaining: 0126:46 Submit Quiz This Question: 1 pt 6 of 10 (0 complete) This Quiz: 10 pts possible The cost of debt Gronseth Drywall Systems, Inc., is in discussions with its investment bankers regarding the issuance of new bonds. different maturities will carry different coupon rates and sell at diferent prices. The firm must choose and ttation costs wil be $40 per bond The company is ta ed at 30% Use the appro rnation formu?a to cal ulate the an tax cod of n anong with the f low the icon located on the top-right comer of the data table below in order to copy its contents into a spreadsheet) The investment banker has informed the firm that among several aternatives. in each case, the bonds will have a $1,000 par value Coupon rate Tme to maturity Premium or discount 10% years $210 The ater-tax cost oftarorg using the approxim ation formula % Round to two decimal places.) answer in the answer box

Explanation / Answer

We will need to estimate the YTM of the given bond to get the before tax cost of debt.

Given:

FV = Par Value = $1000,

N = 5 years,

Coupon = C = 10% *1000 = $ 100,

PV = Par Value + Premium - Flotation cost = 1000 + 210 - 40 = - $ 1170

Using approximation formula for YTM, N = 5, PV = 1170, C = 90, FV = 1000

before cost of debt = YTM = {C + [(FV - PV)/N] } / {(FV + PV)/2}

= {100 + [(1000 - 1170)/5] } / {(1000 + 1170)/2} = 6.083%

after cost of debt = 6.083% * (1 - tax rate) = 6.083% * (1 - 30%) = 4.26% (rounded)

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