Question

Cost of debt with fees. Dunder-Mifflin, Inc.​ (DMI) is selling​ 600,000 bonds to raise money for the publication of new magazines in the coming year. The bonds will pay a coupon rate of 8.4​% with semiannual payments and will mature in 30 years. Its par value is ​$100. DMI hires an investment banker for the sale of the​ 600,000 bonds. The investment banker charges a fee of 2​% on each bond sold. What is the cost of debt to DMI if the following are the proceeds before the​ banker's fees are​ deducted?

a. $46,668,000? ________%​ (Round to two decimal​ places.)

b. ​$55,344,000? ________% (Round to two decimal​ places.)

c. ​$72,354,000? ________​% (Round to two decimal​ places.)

d. ​$82,200,000? ________​% (Round to two decimal​ places.)

Answer 1

a. Price of the bond per $100 =46668000/600000= 77.78

EAR of coupon= (1+8.4%/2)^2-1=8.58%

Investor bank's fees= 77.78*2%=$1.55

Net proceed= (77.78-1.55)=$76.22

If the issue date is 1/1/2019, maturity date is 12/31/2048

So, cost of debt is 11.16%

b. Here net proceed= (55344000/600000)*(1-2%)=$90.39. So, similarly

So, cost of debt =9.36%

c. Here net proceed= (72354000/600000)*(1-2%)=$118.17 So, similarly

Cost of debt 6.95%

d. Here net proceed= (82200000/600000)*(1-2%)=$134.26. So, similarly

So, cost of debt is 5.94%.