The firm currently has one issue of bonds outstanding. The bonds have a par value of...

The firm currently has one issue of bonds outstanding. The bonds have a par value of $1 comma 000 per bond, carry a coupon rate of 8 percent, have 14 years to maturity, and are selling for $1, 070. Nealon's common stock has a current market price of $ 36, and the firm paid a $2.60 dividend last year that is expected to increase at an annual rate of 6 percent for the foreseeable future. What is the cost of new debt financing to Nealon based on current market prices after both taxes (you may use a marginal tax rate of 34 percent for your estimate) and flotation costs of $30 per bond have been considered?

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Expert Solution


	Cost of Bonds:
	Par value of Bond	$1,000
Pmt	Annual coupon payment	$80	(8%*1000)
Nper	Number of years to maturity	14
Pv	Present market price	$1,070
Fv	Payment at maturity	$1,000
RATE	Yield to maturity	7.2%	(Using RATE function of excel with Nper=14,Pmt=80,Pv=-1070, Fv=1000)
	ExcelCommand:RATE(14,80,-1070,1000)

	Flotation Cost per bond	$30
	Before tax Cost of Bond =(72/(1000-30))*100	7.4%
	After tax cost of debt financing:
	7.4(1-tax rate)=7.4(1-0.34)=	4.9%

	COST OF NEW DEBT FINANCING	4.9%

jeff jeffy answered 6 months ago

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