26 Jun COST OF DEBT USING BOTH METHODS
Cost of debt using both methods Currently, Warren Industries can sell 15-year, $1,000-par-value bonds paying annual interest at a 12% coupon rate. As a result of current interest rates, the bonds can be sold for $1,010 each; flotation costs of $30 per bond will be incurred in this process. The firm is in the 40% tax bracket. 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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