Question

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?

Answer 1

		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%