Question: I do not understand how the tutor got 7.15 for before cost of debt. Long-term Borrowing Company (LBC) is raising new capital by selling bonds.

I do not understand how the tutor got 7.15 for before cost of debt.

Long-term Borrowing Company (LBC) is raising new capital by selling bonds. Its investment bankers have estimated that if the company sets the coupon rate for the new bonds at 8% paid semiannually, it can sell them in the market for $1,102 per bond. The new bonds will have 15 years to maturity. The bankers have estimated that the cost of selling the new bonds will be $25 per bond. What is the company's after-tax cost of new debt for this new financing if its tax rate is 30 percent?

Step-by-step explanation

The after tax cost of debt = Before tax cost of debt * (1 - tax rate) = 7.15% * (1 - 30%) =5.01%

The effective selling price for the company = Market price - cost of selling the new bonds = $1,102 - $25 = $1,077

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