The cost of debt that is relevant when companies are evaluating new investment projects is the marginal cost of the new debt that is to be raised to finance the new project.

 Consider the case of Red Oyster Seafood Company:

 Red Oyster Seafood Company can issue a 20-year debt security that pays an annual coupon payment of $90. The bond carries a par value of $1,000 and is currently trading at par. Based on this information, determine the after-tax cost of Red Oyster's debt if the firm's marginal federal-plus-state tax rate is 45%.

Red Oyster's CFO has pointed out that if these new bonds are issued, the company will incur a flotation cost of 2%. Remember, these flotation costs will be (added/subtracted) from the proceeds the firm receives from the sale of its new bonds. Calculate the company's after-tax cost of debt net of the issue's flotation costs.

 If Red Oyster issues its new bonds and incurs flotation costs of 2%, then its adjusted (net) after-tax cost of debt (rounded to four decimal places) will be:

Answer rating: 100% (QA)

To calculate the aftertax cost of Red Oysters debt with a marginal federalplusstate tax rate of 45 f... View the full answer