FoF Chapter 9 Question 2

Cost of debt using both methods (YTM and the approximation formula) Currently, Warren Industries can sell 20 -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 $1,010 each; Warren will incur flotation costs of $30 per bond. The firm is in the 22% 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