NPo = $1,320.52(1-0.105)
Number of Bonds = $500,000/$1,181.87 = 423 Bonds
Cost of Debt: $1,181.87 = $140/(1+kd)t + $1,000/(1+kd)10
kd = 10.92%
After tax cost of debt = 10.92%(1-0.34)=7.21%
the rest of the question that matches the above answers are:
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?
Just so you know, for this:
Price (Po) = $140/(1+0.09)t + $1,000/(1+0.09)10
the t and the 10 are up high, (1+0.09)to the power of t and again as (1_0.09) to the power of 10.
Same with this one:
Ok, I got that. I just didn't know the answers:
What effect does changing the coupon rate have on the firm's after-tax cost of capital?
and Why is theere a change?
I can't just put your response like that. I think it is more specific.
Price (P0) = +
P0 = 935.82
NP0 = 935.82*(1-.105) = 837.56
Number o Bonds Issued = 500,000/837.56 = 597
Cost of Debt:
kd = 10.73%
After tax cost of debt = 10.73*(1-.34) = 7.08%
b. The decrease in coupon rate caused the after tax cost of debt to decrease. As the coupon rate decreased which resulted in lower value on each bond and lesser flotation costs as effect lower after tax cost of debt.
Could you show me the steps between the formula and the answer for the price? The (1+0.09) to the power of t and (1+0.09) to the power of 10 is confusing me.
Wouldn't it be 80/1.09 only once, and then 1000/1.09^10?
I cannot see that link. Please provide the box address as before.
The reason I ask is because someone else got a different answer and I want to see where the error may lie....
They did the price as =$80(6.418)+$1000(.422)
cost of debt:
$935.44 = 80/(1+kd)^t + $1000/(1+kd)^10
kd = 9.01%
After tax cost of debt =9.01%(1-0.34) = 5.95%