Question
Cost of debt using both methods (YTM and the approximation formula) Currently, Warren Industries can sell 15-year, $1,000-par-value bonds paying annual interest at a 12%
Cost of debt using both methods (YTM and the approximation formula) Currently, Warren Industries can sell 15-year, $1,000-par-value bonds paying annual interest at a 12% coupon rate. Because current market rates for similar bonds are just under 12%, Warren can sell its bonds for $1,080 each; Warren will incur flotation costs of $25 per bond. The firm is in the 21% tax bracket.
a.Find the net proceeds from the sale of the bond,Nd.
b.Calculate the bond's yield to maturity (YTM)to estimate the before-tax and after-tax costs of debt.
c.Use the approximation formula to estimate the before-tax and after-tax costs of debt.
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