(Cost of debt)Gillian Stationery Corporation needs to raise $632,000 to improve

Question

(Cost of debt)Gillian Stationery Corporation needs to raise $632,000 to improve its manufacturing plant. It has decided to issue a $1,000 par value bond with an annual coupon rate of 7.5 percent with interest paid semiannually and a 15-year maturity. Investors require a rate of return of 11.4 percent.

a. Compute the market value of the bonds.

b. How many bonds will the firm have to issue to receive the needed funds?

c. What is the firm's after-tax cost of debt if the firm's tax rate is 34 percent?

Explanation / Answer

Solution.

a. Compute the market value of the bonds.

Annual Half Year Face value 1,000.00        1,000.00 Coupon rate 8% 4% Year         15.00            (30.00) Market rate 11.40% 0.057 Payment per year           2.00                2.00 0.057 1.057                    1,000.00       0.1896            189.56       0.8104                          37.50    14.2182            533.18 Bond Price            722.74

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