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21 June, 12:47

QRM, Inc.'s marginal tax rate is 35%. It can issue 10-year bonds with an annual coupon rate of 7% and a par value of $1,000. After $12 per bond flotation costs, new bonds will net the company $966 in proceeds. Determine the appropriate after-tax cost of new debt for the firm to use in a capital budgeting analysis.

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  1. 21 June, 13:57
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    4.87%

    Explanation:

    In this question, we are asked to calculate the appropriate after-tax cost of new debt for the firm to use in capital budgeting analysis.

    PMT = 1000*7% = 70 (indicates the amount of interest payment)

    Nper = 10 (indicates the period over which interest payments are made)

    PV = 966 (indicates the present value)

    FV = 1000 (indicates the future/face value)

    Rate = ? (indicates the cost of debt)

    After Tax Cost of Debt = Rate (Nper, PMT, PV, FV) * (1-Tax Rate) = Rate (10,70,-966,1000) * (1-.35) = 4.87%
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