What do lenders require, and what kind of debt costs the company? The cost of...
90.2K
Verified Solution
Link Copied!
Question
Accounting
What do lenders require, and what kind of debt costs the company? The cost of debt that is relevant when companies are evaluating new investment projects is the marginal cost of the new debt to be raised to finance the new project. Consider the case of Peaceful Book Binding Company (PBBC): Peaceful Book Binding Company is considering issuing a new 20-year debt issue that would pay an annual coupon payment of $80. Each bond in the issue would carry a $1,000 par value and would be expected to be sold for a price equal to its par value. PBBCs CFO has pointed out that the firm would incur a flotation cost of 1% when initially issuing the bond issue. Remember, the flotation costs will be the proceeds the firm will receive after issuing its new bonds. The firms marginal federal-plus-state tax rate is 30%. To see the effect of flotation costs on PBBCs after-tax cost of debt (generic), calculate the after-tax cost of the firms debt issue with and without its flotation costs, and select the correct after-tax costs (in percentage form): After-tax cost of debt without flotation cost: After-tax cost of debt with flotation cost: This is the cost of debt, and it is different from the average cost of capital raised in the past.
Answer & Explanation
Solved by verified expert
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!
