Currently, warren industries can sell 15-year, $1,000 par value bonds paying annual interest at a 7% coupon rate. because current market rates for similar bonds are just under 7%, warren can sell its bonds for $1,010 each; warren will incur flotation costs of $30 per bond will be incurred in this process. the firm is in the 40% tax bracket.
a. find the net proceeds from sale of the bond, nd
b. show the cash flows from the firms point of view over the maturity of the bond.
c. calculate the before tax and after tax costs of debt
d. use the approximation formula to estimate the before tax and after tax costs of debt.
e. compare and contrast the costs of debt calculated in parts c and d.
which approach do you prefer? why?
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