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The firm currently has one issue of bonds outstanding. The bonds have a par value of...

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Finance

The firm currently has one issue of bonds outstanding. The bondshave a par value of ?$1 comma 000 per? bond, carry a coupon rate of8 ?percent, have 14 years to? maturity, and are selling for ?$1,070. ?Nealon's common stock has a current market price of $ 36?,and the firm paid a ?$2.60 dividend last year that is expected toincrease at an annual rate of 6 percent for the foreseeable future.What is the cost of new debt financing to Nealon based on currentmarket prices after both taxes? (you may use a marginal tax rate of34 percent for your? estimate) and flotation costs of ?$30 per bondhave been? considered?

Answer & Explanation Solved by verified expert
3.6 Ratings (381 Votes)

Cost of Bonds:
Par value of Bond $1,000
Pmt Annual coupon payment $80 (8%*1000)
Nper Number of years to    maturity 14
Pv Present market price $1,070
Fv Payment at maturity $1,000
RATE Yield to maturity 7.2% (Using RATE function of excel with Nper=14,Pmt=80,Pv=-1070, Fv=1000)
ExcelCommand:RATE(14,80,-1070,1000)
Flotation Cost per bond $30
Before tax Cost of Bond =(72/(1000-30))*100 7.4%
After tax cost of debt financing:
7.4*(1-tax rate)=7.4*(1-0.34)= 4.9%
COST OF NEW DEBT FINANCING 4.9%

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The firm currently has one issue of bonds outstanding. The bondshave a par value of ?$1 comma 000 per? bond, carry a coupon rate of8 ?percent, have 14 years to? maturity, and are selling for ?$1,070. ?Nealon's common stock has a current market price of $ 36?,and the firm paid a ?$2.60 dividend last year that is expected toincrease at an annual rate of 6 percent for the foreseeable future.What is the cost of new debt financing to Nealon based on currentmarket prices after both taxes? (you may use a marginal tax rate of34 percent for your? estimate) and flotation costs of ?$30 per bondhave been? considered?

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