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Consider the case of Purple Lemon Fruit Company: Purple Lemon Fruit Company is considering issuing a new thirty-year debt issue that would pay an annual

Consider the case of Purple Lemon Fruit Company:

Purple Lemon Fruit Company is considering issuing a new thirty-year debt issue that would pay an annual coupon payment of $80. Each bond in the issue would carry a $1,000 par value and would be expected to be sold for a market price equal to its par value.

Purple Lemons CFO has pointed out that the firm will incur a flotation cost of 3% when initially issuing the bond issue. Remember, these flotation costs will be subtracted from the proceeds the firm will receive after issuing its new bonds. The firms marginal federal-plus-state tax rate is 35%.

To see the effect of flotation costs on Purple Lemons after-tax cost of debt, calculate the before-tax and after-tax costs of the firms debt issue with and without its flotation costs, and insert the correct costs into the boxes. (Note: Round your answer to two decimal places.)

Before-tax cost of debt without flotation cost:

%
After-tax cost of debt without flotation cost:

%
Before-tax cost of debt with flotation cost:

%
After-tax cost of debt with flotation cost:

%

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