Questions

1). BSV Ltd is issuing a zero coupon bond which has a face value of $100,000 and will mature after 5 years from the date of issue. Interest on this bond accrues annually and net proceeds of the bond are $60,000. Use the interpolation method to find the before-tax cost to BSV Ltd of this source of finance. (Hint: IRR falls somewhere between 10-11%).

2).SSK Ltd can sell 10-year, $100 face value coupon bonds with a 12% pa coupon, paid annually.The bonds can be sold for $105 each. Flotation costs of 7.50% will be charged by the underwriter handling the issue. The corporate tax rate is 36 per cent.

a) Find the net proceeds from the sale of the bond

b) Use the approximation formula to estimate the before- and after-tax cost of debt.