Cost of debt using both methods (YTM and the approximation formula) Currently, Warren Industries can sell 10-year, $1,000-par-value bonds paying annual interest at a 11% coupon rate. Because current market rates for similar bonds are just under 11%, Warren can sell its bonds for $1,090 each; Warren will incur flotation costs of $20 per bond. The firm is in the 27% tax bracket, a. Find the net proceeds from the sale of the bond, N. 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.
Cost of debt using both methods (YTM and the approximation formula) Currently, Warren Industries can sell 10-year, $1,000-par-value bonds paying annual interest at a 11% coupon rate. Because current market rates for similar bonds are just under 11%, Warren can sell its bonds for $1,090 each; Warren will incur flotation costs of $20 per bond. The firm is in the 27% tax bracket, a. Find the net proceeds from the sale of the bond, N. 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.
Chapter6: Fixed-income Securities: Characteristics And Valuation
Section: Chapter Questions
Problem 17P
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