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Carraway Seed Company is issuing a ​$1,000 par value bond that pays 9 percent annual interest...

Carraway Seed Company is issuing a ​$1,000 par value bond that pays 9 percent annual interest and matures in 11 years. Investors are willing to pay $975 for the bond. Flotation costs will be 14 percent of market value. The company is in a 25 percent tax bracket. What will be the​ firm's after-tax cost of debt on the​bond?

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Expert Solution

After tax cost of debt

After tax cost of debt= (I*(1-T)+1÷N*(RV-NP)

÷. *100   

1÷2 * (RV+NP)

here

I = interest that is 1000*9÷100= 90

N= No.of year in debt to be redeemed, that is 11 years

RV= Redeemable value of debt, that is 1000

NP= Net proceeds (inflow-flotation) 975 - 14%

975 - 136.5 = 838.5

T= tax rate that is 25%

so,

cost of debt= 90*(1- .25)+1÷11*(1000-838.5)

÷ *100

.5 (1000+838.5)

=(45+14.535) ÷ (919.25 )*100

After tax cost of debt = 6.48%

jeff jeffy answered 2 years ago
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