Consider the case of Purple Lemon Shipbuilders Inc.: Purple Lemon Shipbuilders Inc. can issue a...
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Consider the case of Purple Lemon Shipbuilders Inc.: Purple Lemon Shipbuilders Inc. can issue a 30-year debt security that pays an annual coupon payment of sB5. The bond carries a par value of $1,000 and is currently trading at par. Based on this inforrnation, determine the after-tax cost or purple Lemon's debt if the firm's marginal federal-plus-state tax rate is 40%. Purple Lemon Shipbuilders Inc.'s after-tax cost of debt (rounded to four decimal places) is: o 4.5900% 5.1000% s.3550% s.6100% O Purple Lemon's CFO has pointed out that if these new bonds are issued, the company will incur a fiotation cost of 3%. Remember, these flotation costs will be new bonds. Cakculate the company's after-tax cost of debt net of the issue's flotation costs. from the proceeds the firm receives from the sale of its If Purple Lemon issues its new bonds and incurs notation costs of 3%, then its adjusted (net) after-tax cost of debt (rounded to four decimal places) will be: 5.6100% O 5.86509% O s.2719% 0 5.3550% This is the cast of debt, and it is different from the average cost of capital raised in the past
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