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Linda_us
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(Cost of borrowing) A firm issues a 10-year debt obligation

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(Cost of borrowing) A firm issues a 10-year debt obligation that bears a 12% coupon rate
and gives the investor the right to put the bond back to the issuer at the end of the fifth year
at 103% of its face amount. The issue has no sinking fund. Interest is paid semiannually.
The issuer’s tax rate is 34%.
a. Calculate the after-tax cost of debt, assuming the debt remains outstanding until
maturity.
b. Calculate the after-tax cost of debt, assuming investors put the bond back to the firm at
the end of the fifth year. (Note: Any unamortized issuance expenses and any redemption
premium can be deducted for tax purposes in the year of redemption.)
Submitted: 6 years ago.
Category: Homework
Expert:  Linda_us replied 6 years ago.
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