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St. Thomas Company is planning to issue $1,000 par value bonds. The bonds will have a coupon rate of 9.5 percent and will be sold at a market price of $980. Flotation costs will amount to 4 percent of market value. The bonds will mature in 15 years and coupon payments will be semi-annual. St. Thomas' marginal tax rate is 35%. What is the firm's cost of debt financing?
A. 6.93%
B. 6.68%
C. 6.34%
D. 10.28%
E. 9.76%

Respuesta :

Answer:

B. 6.68%

Explanation:

In this question, we use the Rate formula which is shown in the spreadsheet.  

The NPER represents the time period.  

Given that,  

Present value = $980 - 4% = $940.80

Future value  = $1,000  

PMT = 1,000 × 9.5% ÷ 2 = $47.5

NPER = 15 years × 2 = 30 years

The formula is shown below:  

= Rate(NPER;PMT;-PV;FV;type)  

The present value come in negative  

So, after solving this,  

1. The pretax cost of debt is 10.28%

2. And, the after tax cost of debt would be

= Pretax cost of debt × ( 1 - tax rate)

= 10.28% × ( 1 - 0.35)

= 6.68%

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