Question

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 14.5?% 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 22?% 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.???$46,716,000

b.???$53,034,000

c.???$62,628,000

d.???$73,710,000

Answer 1

a)

price of an individual bond = 46,716,000 / 600,000 = 77.86

Face value = 100

Number of periods = 30 * 2 = 60

Coupon payment = 0.145 * 100 = 14.5 / 2 = 7.25

Cost of debt using a financial calculator = 18.65%

Keys to use in a financial calculator: 2ND I/Y 2, FV = 100, PV = -77.86, N = 60, PMT = 7.25, CPT I/Y

b)

price of an individual bond = 53,034,000 / 600,000 = 88.39

Face value = 100

Number of periods = 30 * 2 = 60

Coupon payment = 0.145 * 100 = 14.5 / 2 = 7.25

Cost of debt using a financial calculator = 16.42%

Keys to use in a financial calculator: 2ND I/Y 2, FV = 100, PV = -88.39, N = 60, PMT = 7.25, CPT I/Y

c)

price of an individual bond = 62,628,000 / 600,000 = 104.38

Face value = 100

Number of periods = 30 * 2 = 60

Coupon payment = 0.145 * 100 = 14.5 / 2 = 7.25

Cost of debt using a financial calculator = 13.88%

Keys to use in a financial calculator: 2ND I/Y 2, FV = 100, PV = -104.38, N = 60, PMT = 7.25, CPT I/Y

d)

price of an individual bond = 73,710,000 / 600,000 = 122.85

Face value = 100

Number of periods = 30 * 2 = 60

Coupon payment = 0.145 * 100 = 14.5 / 2 = 7.25

Cost of debt using a financial calculator = 11.73%

Keys to use in a financial calculator: 2ND I/Y 2, FV = 100, PV = -122.85, N = 60, PMT = 7.25, CPT I/Y