Peaceful Book Binding Company is considering issuing a new twenty-year debt issue that would pay an annual
Question:
Peaceful Book Binding Company is considering issuing a new twenty-year debt issue that would pay an annual coupon payment of $70. Each bond in the issue would carry a $1,000 par value and would be expected to be sold for a market price equal to its par value.
PBBC’s CFO has pointed out that the firm will incur a flotation cost of 1% when initially issuing the bond issue. Remember, these flotation costs will be (subtracted/Added) from the proceeds the firm will receive after issuing its new bonds. The firm’s marginal federal-plus-state tax rate is 45%.
To see the effect of flotation costs on PBBC’s after-tax cost of debt, calculate the before-tax and after-tax costs of the firm’s debt issue with and without its flotation costs, and insert the correct costs into the boxes. (Hint: Round your answer to two decimal places.)
Before-tax cost of debt without flotation cost: | % |
After-tax cost of debt without flotation cost: | % |
Before-tax cost of debt with flotation cost: | % |
After-tax cost of debt with flotation cost: | % |
Foundations of Financial Management
ISBN: 978-1259024979
10th Canadian edition
Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen, Doug Short, Michael Perretta