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Linda_us, Finance, Accounts & Homework Tutor

Category: Homework

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Experience: Post Graduate Diploma in Management (MBA)

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Sincere Stationery Corporation needs to raise $500,000 to improve

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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 coupon rate and a 10-year maturity. The investors require a 9 percent rate of return. Lets say you change the coupon rate to 8 percent. What effect does changing the coupon rate have on the firm's after-tax cost of capital? Why is there a change?

thank you Linda, I will be standing by... If you had the results to the question in the first place with the coupon rate of 14%, would it help so that you could address the question I am asking of the assumed 8% coupon rate how does that effect the firm's after-tax cost of capital? why is there a change?

I think some information is missing because from the given information there would be no change but the question is specifically asking "Why is there a change?"

If this question is not complete, please post complete question?

I have solved the complete question not just the way to solve

here you go

a.

Price (P0) = +

P0 = 935.82

NP0 = 935.82*(1-.105) = 837.56

Number o Bonds Issued = 500,000/837.56 = 597

Cost of Debt:

$837.56 =+

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.

Linda_us and 4 other Homework Specialists are ready to help you

Where did you get the formula from? How do I put that into excel? So, was my initial figures right or wrong for the initial question?

Customer:replied 5 years ago.

Linda,

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.

I copied and pasted the link. I am just telling you that I am confused about the (1 + 0.09)^t and (1+0.09)^10. Please walk me through this part for it is frustrating me.

ok since my brain still a little off... the 80/1.09 goes 10 times and you get a result. Then the 1000/1.09 goes 10 times as well and you get a result. Then you add the 2 together?

ok lamets terms... or whatever.... so can you show me the steps for figuring that out please. so I can see it? I hope not frustrating you, but I am frustrated myself. I need to see what adds into what and all that. Please.

Customer:replied 5 years ago.

The reason I ask is because someone else got a different answer and I want to see where the error may lie....