Nico Trading Corporation is considering issuing longdashterm debt. The debt would have a 30dashyear maturity and a 10 percent coupon rate. In order to sell the issue, the bonds must be underpriced at a discount of 5 percent of face value. In addition, the firm would have to pay flotation costs of 5 percent of face value. The firm's tax rate is 21 percent. Given this information, the afterdashtax cost of debt for Nico Trading would be

Question

Business

Jimena Carpenter

5 October, 15:38

Nico Trading Corporation is considering issuing longdashterm debt. The debt would have a 30dashyear maturity and a 10 percent coupon rate. In order to sell the issue, the bonds must be underpriced at a discount of 5 percent of face value. In addition, the firm would have to pay flotation costs of 5 percent of face value. The firm's tax rate is 21 percent. Given this information, the afterdashtax cost of debt for Nico Trading would be

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Rachael Greer · Answer 1

After tax cost of debt is 8.82%

Explanation:

Given:

Assume coupon payments are made annually.

Face value (assumed) (FV) = $1,000

coupon rate = 10% or 0.1

Coupon payment (PMT) = $100

Maturity period (nper) = 30

Flotation cost = 0.05*1000 = $50

Discount = 0.05*1000 = $50

Price of debt = Face value - Discount - Flotation cost

= $1000 - 50 - 50

= $900

Calculate rate using spreadsheet function = rate (nper, pmt, PV, FV)

Rate or YTM (yield to maturity) is 11.17%

Tax rate = 21% or 0.21

After tax cost of debt = 0.1117 (1 - 0.21)

= 0.0882 or 8.82%