Question

Gray Corporation can issue bonds with 6.25% coupon, $1000 par value, and 10 years remaining to maturity at a price of $925. Investment bankers charge 2.5% of the selling price as their fees. Tax rate is 34%.

compute before tax cost of debit

compute after tax cost of debit

Answer 1

	Par Value of the Bond =	$                          1,000
	Selling price of the bond =	$                              925
	Investment bankers charges 2.5% of the selling price =	$                        23.125
	(2.5% of $ 925)
	COMPUTATION OF THE BEFORE TAX COST OF DEBIT
	Cost of Debit = 2.5 % of $ 925 = ($ 925 X 2.5%) =	$                          23.13
	COMPUTATION OF THE AFTER TAX COST OF DEBIT
	Cost of Debit = 2.5 % of $ 925 = ($ 925 X 2.5%) =	$                          23.13
	Less: Tax Saving on the $ 23.125 X 34% =	$                            7.86
	After Tax Cost of Debit =	$                          15.26
	Answer =
	Before Cost of Debit =	$                          23.13
	After Tax Cost of Debit =	$                          15.26