Question
Gibson Industries is issuing a $1,000 par value bond with an 8% annual coupon rate and that matures in 20 years. Coupon interests are paid
Gibson Industries is issuing a $1,000 par value bond with an 8% annual coupon rate and that matures in 20 years. Coupon interests are paid twice a year. Investors are willing to pay $950 per share for these bonds. Gibson is in the 30% tax bracket.
a) What is the rate of return expected by the bond investor? Hint: Annual Yield to Maturity (YTM).
b) What will be the after-tax cost of debt of the bond?
c) How would your answer to part a) and part b) change, if the investment banker who underwrites the bond issuance charge Gibson a broker fee of 7 cents for every dollar outside investors paid on the bond? No calculation is necessary.
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