Kleig Inc.s bonds are selling to yield 9%. The firm plans to sell new bonds to the

Question:

Kleig Inc.’s bonds are selling to yield 9%. The firm plans to sell new bonds to the general public and will therefore incur flotation costs of 6%. The company’s marginal tax rate is 42%.

a. What is Kleig’s cost of debt with respect to the new bonds?

b. Suppose Kleig also borrows directly from a bank at 12%.

1. What is its cost of debt with respect to such bank loans?

2. If total borrowing is 60% through bonds and 40% from the bank, what is Kleig’s overall cost of debt?

Cost Of Debt
The cost of debt is the effective interest rate a company pays on its debts. It’s the cost of debt, such as bonds and loans, among others. The cost of debt often refers to before-tax cost of debt, which is the company's cost of debt before taking...