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.

Question

Iyana Fischer

Business

12 December, 23:02

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.

+5

Answers (1)

Know the Answer?

Francis Gordon · Answer 1

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%