(Cost of deb) Caraway Seed Company issuing a $1,000 par value bond that pays 7 percent annual rest and matures in years Investors are willing to pay 5085 for the bond Flotation costs will be 14 percent of market value. The company is in a 38 percent tax bracket What will be the firm's antenas cost of debt on the bond? The firm's after-tax cost of dietit on the borld was bound to be decimal places)

Answer 1

To calculate the firm's before-tax cost of debt on the bond, we need to take into account the flotation costs. The flotation costs are given as 14% of the market value, which is $5,085. Thus, the flotation costs amount to 0.14 * $5,085 = $710.90.

The net proceeds from the bond issuance will be the market value minus the flotation costs, which is $5,085 - $710.90 = $4,374.10.

Next, we need to calculate the annual interest payment on the bond. The bond pays 7% annual interest on the $1,000 par value, so the annual interest payment is 0.07 * $1,000 = $70.

Since the company is in a 38% tax bracket, the after-tax cost of debt on the bond is the before-tax cost multiplied by (1 - tax rate). Therefore, the after-tax cost of debt on the bond is:
Before-tax cost of debt = annual interest payment / net proceeds from bond issuance
= $70 / $4,374.10 = 0.016

After-tax cost of debt = before-tax cost of debt * (1 - tax rate)
= 0.016 * (1 - 0.38) = 0.016 * 0.62 = 0.00992 or 0.992% (rounded to 4 decimal places)

Therefore, the firm's after-tax cost of debt on the bond is approximately 0.992%.