A company has decided to raise debt finance through a bond issue. The bonds have a...
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A company has decided to raise debt finance through a bond issue. The bonds have a $100 par value with a 10-year maturity and a 5% per annum coupon interest rate with coupon interest payments made annually. The bonds will be issued at their par value. Issue costs are 1.5% of the issue price. Assume a company tax rate of 30%. (a) What will be the net price per bond? (1 mark) (b) Calculate the before tax yield for the bond issue. (4 marks) (c) Explain why the answer to (b) must be different from the coupon interest rate. (2 marks) (d) Calculate the after tax yield for the bond issue. (3 marks) (e) How many bonds will the company need to issue to obtain $1,000,000 in funds after issue costs? (2 marks) A company has decided to raise debt finance through a bond issue. The bonds have a $100 par value with a 10-year maturity and a 5% per annum coupon interest rate with coupon interest payments made annually. The bonds will be issued at their par value. Issue costs are 1.5% of the issue price. Assume a company tax rate of 30%. (a) What will be the net price per bond? (1 mark) (b) Calculate the before tax yield for the bond issue. (4 marks) (c) Explain why the answer to (b) must be different from the coupon interest rate. (2 marks) (d) Calculate the after tax yield for the bond issue. (3 marks) (e) How many bonds will the company need to issue to obtain $1,000,000 in funds after issue costs? (2 marks)
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Answer rating: 100% (QA)
a The net price per bond can be calculated as follows Net price per bond Par value Issue costs Net p... View the full answer
Related Book For
Foundations of Financial Management
ISBN: 978-1259024979
10th Canadian edition
Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen, Doug Short, Michael Perretta
Posted Date:
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