Insu ucto -created question Cost ofo ebensing both methods YT Cumenty, Wameninds

Question

Insu ucto -created question Cost ofo ebensing both methods YT Cumenty, Wamenindst ies can sell 20-year, $1000 pa value b dspayng an almerest at a 11% coup tate Asars it ofanent nterest rates the beds an be sold fo S1100 each before incurring flotation costs of $30 per bond The firm is in the 35% tax bracket a. Find the net proceeds from the sale of the bond, N b. Cakculate the bond's yield to matunly (VTM) to estimate the before-tax and after-tax costs ofl debe a. The net proceeds hom the sale ofthe bond Noi, Rondtothe nearest dole) b. Usingthe bond's YTMth@ before.tax cost of debt is% (Round to two decimal place. ) Usingthe band's YTMthe aftertax cost of debtis% (Round to two decinal places)

Explanation / Answer

Part - A

Net Proceeds from sale of bond = Sales Value - Flotation cost

=1100-30

= 1,070

Part -B

YTM before Tax

YTM = Interest +Amortisation/Average price

=110+(1070-1000/20)

_________________

(1070+1000)/2

=113.50/1035

=10.97%

YTM = 10.97%

Part -C

YTM After Tax

YTM =Interest After Tax+Amortisation/Average Price

=110(1-0.35)+(1070-1000/2)

_______________________

(1070+1000)/2

=75/1035*100

=7.25%

YTM = 7.25%

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