Cost of debt using both methods (YTM and the approximation formula) Currently, W

Question

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 1 1% coupon rate. As a result of current interest rates, the bonds can be sold for $980 each before incurring flotation costs of $30 per bond. The firm is in the 30% 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 950(Round to the nearest dollar.) b. Using the bond's YTM, the before-tax cost of debt is %. (Round to two decimal places.)

Explanation / Answer

using Financial calculator

FV=1000 (enter)

PMT=110 (enter) 11% of par value=11% of 1000=110

PV=-950 (enter)

N=15 (enter)

Press CPT and I/Y

I/Y=11.72%

Before tax cost of debt=11.72%

Answer C) after tax cost of debt= before tax cost × (1- marginal tax rate)

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