In: Finance
Jimstan & Jimstan Corp. can sell a new 10-year bond with an annual coupon of 5.5% and a face value of $1,000 for $1,206.33. The company will incur flotation costs of $40 per bond and has a tax rate of 27%.
Part 1
What are the net proceeds from selling the bond?
Nd=P−F=1,206.33−40=Nd=P-F=1,206.33-40= 1,166.33 Correct ✓
Part 2
What is the company's pre-tax cost of debt?
Part 1-The net proceeds from selling the bond
The net proceeds from selling the bond = Current market price of the Bond – Flotation Costs
= $1,206.33 - $40
= $1,166.33
Part 2-The Company's pre-tax cost of debt
Variables |
Financial Calculator Keys |
Figure |
Par Value/Face Value of the Bond [$1,000] |
FV |
1,000 |
Coupon Amount [$1,000 x 5.50%] |
PMT |
55 |
Market Interest Rate or Yield to maturity on the Bond |
1/Y |
? |
Maturity Period/Time to Maturity [10 Years] |
N |
10 |
Bond Price/Current Market Price of the Bond [-$1,166.33] |
PV |
-1,166.33 |
We need to set the above figures into the financial calculator to find out the Yield to Maturity of the Bond. After entering the above keys in the financial calculator, we get the annual yield to maturity on the bond (1/Y) = 3.50%.
“Hence, the Company's pre-tax cost of debt will be 3.50%”