Best Buy reports in a recent balance sheet that the company has $1,253 million long-term debt outstanding. Included in that amount is a $500 million debt issue due October 1, 2028, that has an interest rate of 4.45 percent. Assuming an approximate income tax rate of 25 percent, respond to the following with regard to the $500 million debt due in 2028.
a. Compute the company’s after-tax cost of borrowing on this bond issue stated as a total dollar amount.
b. Compute the company’s after-tax cost of borrowing on this bond issue stated as a percentage of the amount borrowed.
c. Describe briefly the advantage of raising funds by issuing bonds as opposed to stocks.