(Cost

of

debt)

Sincere Stationery Corporation needs to raise

$500,000

to improve its manufacturing plant. It has decided to issue a

$1,000

par value bond with an annual coupon rate of

14

percent and a maturity of

10

years. The investors require a rate of return of

9

percent.

a. Compute the market value of the bonds.

b. What will the net price be if flotation costs are

10.5

percent of the market price?

c. How many bonds will the firm have to issue to receive the needed funds?

d. What is the firm's after-tax cost of debt if its average tax rate is 25 percent and its marginal tax rate is

21

percent?

e. Rework the problem as follows: Assume a coupon rate of

8

percent.

f. What effect does changing the coupon rate have on the firm's after-tax cost of capital? Why is there a change?

Question content area bottom

Part 1

a. If the bond's annual coupon rate is

14%,

what is the market value of the bond?

$enter your response here

(Round to the nearest cent.)

Part 2

b. What will the net price be if flotation costs are

10.5

percent of the market price?

$enter your response here

(Round to the nearest cent.)

Part 3

c. How many bonds will the firm have to issue to receive the needed funds?

enter your response here

bonds(Round to the nearest whole number.)

Part 4

d. What is the firm's after-tax cost of debt if its marginal tax rate is

21

percent?

enter your response here%

(Round to two decimal places.)

Part 5

e. If the bond's annual coupon rate is

8%,

what is the market value of the bond?

$enter your response here

(Round to the nearest cent.)

Part 6

What will the net price be if flotation costs are

10.5

percent of the market price?

$enter your response here

(Round to the nearest cent.)

Part 7

How many bonds will the firm have to issue to receive the needed funds?

enter your response here

bonds(Round to the nearest whole number.)

Part 8

What is the firm's after-tax cost of debt if its marginal tax rate is

21

percent?

enter your response here%

(Round to two decimal places.)

Part 9

c. Which of the following statements best describes the effect of coupon rate on the firm's after-tax cost of debt?(Select the best choice below.)