Question
Cost of debt using both methods (YTM and the approximation formula)Currently, Warren Industries can sell 20 dash year, $1 comma 000-par-value bonds paying annual interest
Cost of debt using both methods (YTM and the approximation formula)Currently, Warren Industries can sell 20 dash year, $1 comma 000-par-value bonds paying annual interest at a 11% coupon rate. Because current market rates for similar bonds are just under 11%, Warren can sell its bonds for $1 comma 060 each; Warren will incur flotation costs of $20 per bond. The firm is in the 29% tax bracket.
a.Find the net proceeds from the sale of the bond, Upper N Subscript d.
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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