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 15.5​% 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 2​% 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. What is the cost of debt to DMI if the bond proceeds are ​$51,732,000 before the​ banker's fees are​ deducted?

​ (Round to two decimal​ places.)

b. What is the cost of debt to DMI if the bond proceeds are ​$54,246,000 before the​ banker's fees are​ deducted?

​ (Round to two decimal​ places.)

c. What is the cost of debt to DMI if the bond proceeds are $69,018,000 before the​ banker's fees are​ deducted?

​ (Round to two decimal​ places.)

d. What is the cost of debt to DMI if the bond proceeds are ​$72,786,000 before the​ banker's fees are​ deducted?

​ (Round to two decimal​ places.)

Answer 1

a)

The price of a single bond = $51,732,000 / 600,000 = $86.22

Fee is 2% so the net proceeds = $86.22 × ( 1 - .02) = $84.4956

Cost of debt is given by

$84.4956 = $100 / (1+ (YTM/2))60 + $7.75 × (1 – 1/(1 + (YTM/2))60)/(YTM/2)

We shall use calculator for the same.

INPUTS 60 ? -84.4956 7.75 100

Variables N I/Y PV PMT FV

OUTPUT %

b)

The price of a single bond = $54246000 / 600,000 = 90.41

Fee is 2% so the net proceeds = $90.41 × ( 1 - .02) = $88.6018

Cost of debt is given by

$88.6018 = $100 / (1+ (YTM/2))60 + $7.75 × (1 – 1/(1 + (YTM/2))60)/(YTM/2)

We shall use calculator for the same.

INPUTS 60 ? -88.6018 7.75 100

Variables N I/Y PV PMT FV

OUTPUT %

c)

The price of a single bond = $69018000 / 600,000 = $115.03

Fee is 2% so the net proceeds = $115.03 × ( 1 - .02) = $112.7294

Cost of debt is given by

$112.7294 = $100 / (1+ (YTM/2))60 + $7.75 × (1 – 1/(1 + (YTM/2))60)/(YTM/2)

We shall use calculator for the same.

INPUTS 60 ? -112.7294 7.75 100

Variables N I/Y PV PMT FV

OUTPUT %

d)

The price of a single bond = $72786000 / 600,000 = $121.31

Fee is 2% so the net proceeds = $121.31 × ( 1 - .02) = $118.8838

Cost of debt is given by

$118.8838 = $100 / (1+ (YTM/2))60 + $4.85 × (1 – 1/(1 + (YTM/2))60)/(YTM/2)

We shall use calculator for the same.

INPUTS 60 ? -118.8838 7.75 100

Variables N I/Y PV PMT FV

OUTPUT %