Sincere Stationery Corporation needs to raise $800,000 to improve its manufactur
ID: 2737581 • Letter: S
Question
Sincere Stationery Corporation needs to raise $800,000 to improve its manufacturing plant. It has decided to issue a $1,000 par value bond with an annual coupon rate of 15 percent and a maturity of 18 years. The investors require a rate of return of 12 percent.
a.Compute the market value of the bonds.
b.What will the net price be if flotation costs are 12 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 37 percent?
Explanation / Answer
a.Market price of the bond
b.
Net price=Market price-12% of Market price=$1,217.49*88%=$1,071.39
c.
How many bonds will the firm have to issue to receive the needed funds=Required fund/Net market price=$800,000/$1071.39=746.69=747 (rounding )
d.
the firm's after-tax cost of debt if its average tax rate is=Cost of debt*(1-Tax rate)=15%(1-0.25)=11.25%
Market Price of the bond Year Cash flow Pv@12% PV 1 150 0.8929 133.93 2 150 0.7972 119.58 3 150 0.7118 106.77 4 150 0.6355 95.33 5 150 0.5674 85.11 6 150 0.5066 75.99 7 150 0.4523 67.85 8 150 0.4039 60.58 9 150 0.3606 54.09 10 150 0.3220 48.30 11 150 0.2875 43.12 12 150 0.2567 38.50 13 150 0.2292 34.38 14 150 0.2046 30.69 15 150 0.1827 27.40 16 150 0.1631 24.47 17 150 0.1456 21.85 18 150 0.1300 19.51 18 1,000 0.1300 130.04 1,217.49