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Linda_us, Finance, Accounts & Homework Tutor
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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?
Thanks for requesting me. Are you able to understand the solution for the earlier question I provided.

Regards

Linda
Customer: replied 6 years ago.
yes I was able to understand it. Thanks. I want to have you respond to the question I asked about Sincere.
I will post the solution soon.
Is there any other information given like flotation cost?

Regards

Linda
Customer: replied 6 years ago.
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?
Regards
Linda
Customer: replied 6 years ago.
Price (Po) = \$140/(1+0.09)t + \$1,000/(1+0.09)10

=\$140(6.418)+\$1000(.422)

=\$1,320.52

NPo = \$1,320.52(1-0.105)

=1,181.87

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%

Customer: replied 6 years ago.

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?

So now we are given flotation cost we can solve the question.

I am working on it.

Regards

Linda
Customer: replied 6 years ago.
Let me know please

Please note that I get credit for my work only when you click accept.

You can request me by writing "FOR LINDA" in front of your post.

Regards

Linda
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Customer: replied 6 years ago.

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:

Cost of Debt: \$1,181.87 = \$140/(1+kd)t + \$1,000/(1+kd)10

We solve question similarly just replacing \$80 wherever \$140 is given.

You can see your solution here

http://www.box.net/shared/5ex6khs9x638341r8pcs

Please note that I get credit for my work only when you click accept.

You can request me by writing "FOR LINDA" in front of your post.

Regards

Linda
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Customer: replied 6 years ago.

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.

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.

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Customer: replied 6 years ago.
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 6 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.

Your initial figure were correct for 14%. In excel you can solve it using PV function and Rate function.

I solved it by the method you used. If you need it in excel let me know.

But I noticed that you are not viewing the files I am attaching.

copy paste this link

http://www.box.net/shared/5ex6khs9x638341r8pcs

Regards

Linda
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Customer: replied 6 years ago.
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.
Customer: replied 6 years ago.
I need it in excel formatting as well.
You need to do the following

= 80/(1.09)^1 + 80/(1.09)^2 + 80/(1.09)^3........80/(1.09)^10 (upto year 10)

Basically you are calculating PV for each year of interest payment and adding then

And then adding 1000/(1.09)^10 which is the present value of 1000 @9%

Regards

Linda
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Customer: replied 6 years ago.

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.

80/1.09 is not once as the interest would be each year.

Here is the link

http://www.box.net/shared/bbqdl5e6gs3462kgjp78

Regards

Linda
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Customer: replied 6 years ago.
ok, so t = the number of years, correct?
Yes.
Customer: replied 6 years ago.
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?
Yes 80/1.09 goes 10 times but it goes like

80/(1.09^1) + 80/(1.09^2)........+80/(1.09^10)

This is interest which is paid every year

-----

But 1000/(1.09^10) is only once

This is return of Principal amount hence only once.

Regards

Linda

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Customer: replied 6 years ago.
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 6 years ago.

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)

= \$935.44

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%

= 80/(1.09) + 80/(1.09^2) + 80/(1.09^3) + 80/(1.09^4) + 80/(1.09^5) + 80/(1.09^6) + 80/(1.09^7) + + 80/(1.09^8) + + 80/(1.09^9) + 80/(1.09^10 + 1000/(1.09^10)

= 73.39 + 67.33 + 61.77 + 56.67 + 51.99 + 47.70 + 43.76 + 40.15 + 36.83 + 33.79 + 422.41
= 935.82

Please note that I get credit for my work only when you click accept.

Bonus would be highly appreciated.

Regards

Linda
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Customer: replied 6 years ago.
I gave you a \$8 tip. I thank you for your help. When are you on? I have more problems, but too tired to finish them up now.
I am online now.

Regards

Linda
Customer: replied 6 years ago.
Thanks for everything. Please close this question.