Busıness Fınance Iı Deneme Sınavı Sorusu #974186
ANT Corp. issues bonds to borrow $500,000 required for capital investments. The bonds have a face value of $1,000, pay 5% annual coupons and mature in 8 years. The bonds are sold at par; however, the company incurs flotation (commissions and fees) costs of 4% on the bond issue. ANT's tax rate is 35%.
What is the after-tax cost of the bond issue?
|
0.036627 |
|
0.073254 |
|
0.109881 |
|
0.183135 |
|
0.549405 |
Although the investors pay the face value of $1,000 to buy a share of ANT bonds, the company will net 96% of this amount as 4% flotation cost is incurred on the bond issue. However, the coupon payments are made on the face value. ANT receives:
$500,000*0.96= $480,000
The coupon payments are: $500,000*0.05= $25,000
The before-tax cost of the bonds is calculated from the equation below:
k= 0.056349
After-tax k= 0.056349*(1-0.35) = 0.036627
The correct answer is A.
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