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

Bridget Best

20 March, 10:04

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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Kristen Copeland · 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%