P$9-2$ Flotation costs and the cost of debt Currently, Jackson Real Estate Inc. can sell

$10-$year, $$100-$par$-$value bonds paying annual interest at a $6\%$ coupon rate. Jackson

can sell its bonds for $$106\mathrm{.}20$ each. Jackson will incur flotation costs of $$2\mathrm{.}50$ per

bond in this process. The firm is in the $25\%$ tax bracket.

a$.$ Find the net proceeds from sale of the bond, $N_d.$

b$.$ Show the cash flow from the firm's point of view over the maturity of the bond.

c$.$ Calculate the before$-$tax and after$-$tax costs of debt.

d$.$ Use the approximation formula to estimate the before$-$tax and after$-$tax costs of

debt.

e$.$ Compare the costs of debt calculated in parts $c$ and $d.$ Which approach do you

prefer? Why?

Personal Finance Problem

P$9-3$ Flotation costs and the cost of debt In March of $2020$ PepsiCo, Inc. $($PEP$)$ sold $$750$

million worth of $40-$year $3\mathrm{.}875\%$ coupon bonds that pay semi$-$annual interest. At

the time the bonds were issued, the market paid $$994\mathrm{.}20$ per bond and the flotation

cost was $$18\mathrm{.}76$ per bond. Pepsi's corporate tax rate is $21\%.$

a$.$ Ignoring flotation costs, what is Pepsi's before$-$tax and after$-$tax costs of debt?

b$.$ Considering flotation costs, what is Pepsi's before$-$tax and after$-$tax costs of debt?

P$9-4$ Before$-$tax cost of debt and after$-$tax cost of debt Jim Paige is opening his own

restaurant, and he is taking out a $10-$year mortgage. Jim will borrow $$400,000$

from a bank and to repay the loan, he will make $120$ monthly payments $($principal

and interest$)$ of $$4,420\mathrm{.}82$ per month over the next $10$ years. Jim is in the $30\%$ tax

bracket.

a$.$ What is the before$-$tax interest rate $($per year$)$ on Jim's loan?

b$.$ What is the after$-$tax interest rate that Jim is paying?

P$9-5$ After$-$tax cost of debt For each of the following $1,000-$par$-$value bonds, assuming

annual interest payment and a $20\%$ tax rate, calculate the after$-$tax cost of debt.