Homework: HW6 Save Score: 1.6 of 8 pts 4 of 12 (11 complete) Score: 78.27%, 78.2

Question

Homework: HW6 Save Score: 1.6 of 8 pts 4 of 12 (11 complete) Score: 78.27%, 78.27 of 100 pts 29-2 (similar to) Question Help * Cost of debt using both methods (YTM and the approximation formula) Currently, Warren Industries can sell 15-year, $1,000-par-value bonds paying annual interest at a 9% coupon rate. As a result of current interest rates, the bonds can be sold for $980 each before incurring flotation costs of $20 per bond. The firm is in the 35% tax bracket. a. Find the net proceeds from the sale of the bond, Nd. b. Calculate the bond's yield to maturity (YTM) to estimate the before-tax and after-tax costs of debt. c. Use the approximation formula to estimate the before-tax and after-tax costs of debt. a. The net proceeds from the sale of the bond, Nd, is S 960. (Round to the nearest dollar.) b. Using the bond's YTM, the before tax cost of debt is 9.46 %. (Round to two decimal places.)

Explanation / Answer

1.
Net proceeds=980-20=960
2.
YTM=RATE(15,9%*1000,-960,1000)=9.511%
Before-tax cost of debt=9.511%
After-tax cost of debt=9.511%*(1-35%)=6.182%
3.
Approximation formula
=(interest payments+(par value-net proceeds)/maturity)/((net proceeds+par value)/2)
(9%*1000+(1000-960)/15)/((960+1000)/2)=9.456%
Before-tax cost of debt=9.456%
After-tax cost of debt=9.456%*(1-35%)=6.146%

Related Questions

Navigate

• Browse (All)
• Browse H
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.