question archive Crandal Dockworks is undergoing a major expansion
Crandal Dockworks is undergoing a major expansion
Subject:FinancePrice:2.86 Bought3
Crandal Dockworks is undergoing a major expansion. The expansion will be financed by issuing new 15-year, $1,000 par, 10% semi-annual coupon bonds. The market price of the bonds is $1,090 each. Crandal's flotation expense on the new bonds will be $40 per bond. Crandal's marginal tax rate is 25%. What is the After-Tax cost of debt for the newly-issued bonds?
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Before tax Cost of Debt
Nper = 15 * 2 = 30 semi annual periods
PMT = FV * Coupon rate / Coupon Frequency in a year = 1000 * 10% / 2 = 50 $
PV = - ( Current Price - Floatation cost) = - (1090 $ - 40 $ ) = - 1050 $
FV = 1000 $
Before tax Cost of Debt = Rate(Nper,PMT,PV,FV) * Coupon Frequency in a year = Rate(30,50,-1050,1000) * 2 = 9.37 %
After tax Cost of Debt = Before tax Cost of Debt * ( 1 - Tax rate) = 9.37 % * ( 1 - 25%) = 7.03%
