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 11.3​% 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 11​% 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. 44,256,000

b. 54,726,000

c. 64,602,000

d. 77,790,000

Answer 1

	Proceeds before fees	Proceeds after fees (89% of original)
a	$                   44,256,000	$               39,387,840
b	$                   54,726,000	$               48,706,140
c	$                   64,602,000	$               57,495,780
d	$                   77,790,000	$               69,233,100
This proceeds after fees is PV for calculation of cost of debt
Case a	PV	$               39,387,840
	FV	$               60,000,000
	PMT	3,390,000	(60M x 11.3%/2)
	NPER	60	(30 X 2)
	Cost of debt	17.28%
		=RATE(60,3390000,-39387840,60000000)*2
Case b	PV	$               48,706,140
	FV	$               60,000,000
	PMT	3,390,000	(60M x 11.3%/2)
	NPER	60	(30 X 2)
	Cost of debt	13.98%
		=RATE(60,3390000,-48706140,60000000)*2
Case c	PV	$               57,495,780
	FV	$               60,000,000
	PMT	3,390,000	(60M x 11.3%/2)
	NPER	60	(30 X 2)
	Cost of debt	11.81%
		=RATE(60,3390000,-57495780,60000000)*2
Case d	PV	$               69,233,100
	FV	$               60,000,000
	PMT	3,390,000	(60M x 11.3%/2)
	NPER	60	(30 X 2)
	Cost of debt	9.71%
		=RATE(60,3390000,-69233100,60000000)*2
Note: if there is any query or doubt, please ask in comment, Thanks