Homework Answers
a) Net proceeds from the bond are equal to bond sale price - floatation cost
=$1020 -$25
=$995
b) Calculation of YTM
PMT is coupon payment per year = 13% of 1000 = 130
YTM before tax is calculated in Excel using the RATE formula as:
=RATE(nper,pmt,pv,fv,,)
=RATE(10,130,-995,1000)
=13.09%
If before tax is 13.09%, then after tax is:
=13.09%(1-0.40)
=7.854%
c) cost of debt using approximation formula
the formula is:
cost of debt =[ Interest + (face value - net proceeds)/n ] / [(face value + net proceeds) / 2]
=[130 + (1000-995)/10] / [(1000+995)/2]
=13.083%
aftter tax is:
=13.083%(1-0.04)
=7.8496%
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a. The after-tax cost of debt using the bond's yield to
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The after-tax cost of debt using the approximation formula
is
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The cost of new common stock is
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r estat a 13% coupon a les current markerer wir bonds Cost of using both methods (YTM and the approximation formula) Currenty, Warren Industries can el 20 year $1.000 par le bonds paying a W e cant bonds for $1.070 Waren will incur Bobiono 125 per bond. The firm is in the 20% wax bracket Find the proceeds from the sale of the bond, No b. Colore bonds yold to morty (YTM the before-baxandax costs of debt the approximation formula...
a. The after-tax cost of debt using the bond's yield to
maturity (YTM) is
The after-tax cost of debt using the approximation formula
is
b. The cost of preferred stock is
c. The cost of retained earnings is
The cost of new common stock is
d. Using the cost of retained earnings, the firm's WACC
is
Using the cost of new common stock, the firm's WACC is
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