Question

3. CDL Inc. currently has a $10 million bond issue outstanding, which carries a coupon rate of 8.3% paid semi-annually, has 4 years remaining until maturity, and is priced to provide for a yield to maturity of 8.16%. The firm’s underwriter has indicated that flotation costs on new debt will be 5% before-tax. What is the component cost of debt if CDL’s tax rate is 35%?
a) 5.37%
b) 5.48%
c) 5.58%
d) 8.43%

Answer 1

5.58%