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How did they arrive with the before-tax cost of debt and the after-tax cost of debt in the table located below from the following information.
How did they arrive with the before-tax cost of debt and the after-tax cost of debt in the table located below from the following information. Please show all workings.
The company will contract a new loan in the sum of $2,000,000 that is secured by machinery and the loan has an interest rate of 6 percent. Healthy Options has also issued 4,000 new bond issues with an 8 percent coupon, paid semiannually, and which matures in 10 years. The bonds were sold at par, and incurred floatation cost of 2 percent per issue.
Loan amount | 2000000 |
Interest rate | 6% |
Par Value | 1000 |
Coupon rate | 8% |
Time to maturity | 10 |
Payment frequency | 2 |
Bond price | 980 |
YTM | 4.15% |
No. of bonds | 4000 |
Debt raised | 3920000 |
Market Value of Debt (MVd) | 5920000 |
% Debt | 32.49% |
Before tax Cost of debt | 4.77% |
After tax Cost of debt | 3.58% |
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