Sincere Stationery Corporation needs to raise $500,000 to improve its manufactur
ID: 2669550 • Letter: S
Question
Sincere Stationery Corporation needs to raise $500,000 to improve its manufacturing plant. It has decided to issue a $1,000 par value bond with a 14 percent annual coupon rate and a 10-year maturity. The investors require a 9 percent rate of return.a. Compute the market value of the bonds.
b. What will the net price be if flotation costs are 10.5 percent of the market price?
c. How many bonds will the firm have to issue to receive the needed funds?
d. What is the firm’s after-tax cost of debt if its average tax rate is 25 percent and its marginal tax rate is 34 percent?
Explanation / Answer
Bond Face Value FV=1000 Coupon 14%, So PMT = 14%*FV=140 nper = 10yrs Rate = 9% a. Mkt Value of Bond PV = PV(rate,nper,PMT,FV) = PV(9%,10,140,1000) = $1,320.88 b. 10.5% of Mkt price = 10.5%*$1,320.88 = $138.69 SO Net price per bond = 1320.88-$138.69 = $1,182.19 c. As Firm needs $500,000 & each bond post floataion cost will give $1,182.19 , no of bonds to be issued = $500,000/$1,182.19 = 423 d. And the aftertax cost of debt is: = 9%*(1 –0.34) = 5.94%