A casino is undergoing a major extension. The expansion will be financed by issu

Question

A casino is undergoing a major extension. The expansion will be financed by issuing new 15-year, $1,000 par, 8% annual Coupon bonds. The market price of the bond is $1,100 each. The flotation expense on the new bonds will be $20 per bond. The marginal tax rate is 40%. What is the Yield to Maturity on the newly-issued bonds?

A) 6.9%
B) 7.2%
C) 8.0 %
D) 4.8%

Using this informtion above, what is the pre-tax cost of debt for the newly-issued bonds? Also, what is the relevant cost of the new bonds for capital budgeting?

Explanation / Answer

Option B) 7.2% is the answer

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