Logo
Home Study Material Contact Search
AI Chat FREE
  1. business
  2. finance
  3. a firm has a 28% tax rate and has decided to issue

A firm has a 28% tax rate and has decided to issue $250 million of 12-year...

Free

80.2K

Verified Solution

Question

Finance

A firm has a 28% tax rate and has decided to issue $250 millionof 12-year debt. If it makes a U.S. public offering, the offeringwould carry an 8.5% coupon, paid semiannually, and issuing wouldcost $2 million. What is the after-tax cost (APY) of borrowing?

Answer & Explanation Solved by verified expert
4.0 Ratings (488 Votes)

flotation cost = issue cost/amount issued =2/250= 0.008

Cost of debt
                                         K = Nx4
Bond Price *(1-flotation %) =? [(Quarterly Coupon)/(1 + YTM/4)^k]     +   Par value/(1 + YTM/4)^Nx4
                                          k=1
                                         K =12x4
1000*(1-0.008) =? [(8.5*1000/400)/(1 + YTM/400)^k]     +   1000/(1 + YTM/400)^12x4
                                          k=1
YTM = 8.6075764778
After tax cost of debt = cost of debt*(1-tax rate)
After tax cost of debt = 8.6075764778*(1-0.28)

6.2%
Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:
  • Unlimited Question Access with detailed Answers
  • Zin AI - 3 Million Words
  • 10 Dall-E 3 Images
  • 20 Plot Generations
  • Conversation with Dialogue Memory
  • No Ads, Ever!
  • Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!
Become a Member

Transcribed Image Text

A firm has a 28% tax rate and has decided to issue $250 millionof 12-year debt. If it makes a U.S. public offering, the offeringwould carry an 8.5% coupon, paid semiannually, and issuing wouldcost $2 million. What is the after-tax cost (APY) of borrowing?

Other questions asked by students

Q

Financing Deficit Stevens Textile Corporation's 2016 financial statements are shown below: Balance Sheet as of December 31, 2016 (Thousands...

Finance
Q

Grades and AM/PM Section of Stats: There were two large sections of statistics this term at...

Basic Math
Q

HPV infections:are associated with various cancers.are caused by a bacterial microorganism.are usually treated with antibiotics.have...

Biology
Q

How does the sodium potassium pump make the interior of the cell negatively charged O...

Biology
Q

You are given several identical resistances each of value R 10 22 and each capable...

Physics
Q

A charged particle has drift velocity of 7 5 10 4 m s and has...

Physics
Q

17 Two mutually perpendicular SHMs of equations x a sin cot y b coscot are...

Physics
Q

There are approximately 7.5 x 1018 grains of sand on Earth. There are approximately 7*...

Basic Math
Q

17 Find the area of the shaded region The graph depicts IQ scores of adults...

Statistics
Q

The graph of the function y=x-7 is obtained by moving the parent function y =...

Algebra
Q

Which of the following should be deducted from net income in calculating net cash flow...

Accounting
Q

How can i calculate the Relative Return? 2 Ticker ORCL MSFT NVDA 6/30/2017 50.14...

Accounting