Flotation costs and the cost of debt Currently, Warren Industries can sell 15-year, $1,000-par-value bonds paying annual interest at a 12% coupon rate. Because current market rates for similar bonds are just under 12%, Warren can sell its bonds for $970 each; Warren will incur flotation costs of $35 per bond. The firm is in the 28% tax bracket. a. Find the net proceeds from the sale of the bond, Nd. b. Calculate the before-tax and after-tax costs of debt.
Flotation costs and the cost of debt Currently, Warren Industries can sell 15-year, $1,000-par-value bonds paying annual interest at a 12% coupon rate. Because current market rates for similar bonds are just under 12%, Warren can sell its bonds for $970 each; Warren will incur flotation costs of $35 per bond. The firm is in the 28% tax bracket. a. Find the net proceeds from the sale of the bond, Nd. b. Calculate the before-tax and after-tax costs of debt.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Flotation costs and the cost of debt Currently, Warren Industries can sell 15-year, $1,000-par-value bonds paying annual interest at a 12% coupon rate. Because current market rates for similar bonds are just under 12%, Warren can sell
its bonds for $970 each; Warren will incur flotation costs of $35 per bond. The firm is in the 28% tax bracket.
a. Find the net proceeds from the sale of the bond, Nd.
b. Calculate the before-tax and after-tax costs of debt.
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