1.A bond has a $15million face value and a coupon rate of 9 percent. It has floatation costs of 5 percent of the face value. The bond matures in 10 years. The firm’s average tax rate is 30 percent and its marginal tax rate is 21 percent. Compute the after-tax cost of debt.
Debenture Valuation
A debenture is a private and long-term debt instrument issued by financial, non-financial institutions, governments, or corporations. A debenture is classified as a type of bond, where the instrument carries a fixed rate of interest, commonly known as the ‘coupon rate.’ Debentures are documented in an indenture, clearly specifying the type of debenture, the rate and method of interest computation, and maturity date.
Note Valuation
It is the process to determine the value or worth of an asset, liability, debt of the company. It can be determined by many processes or techniques. Many factors can impact the valuation of an asset, liability, or the company, like:
1.A bond has a $15million face value and a coupon rate of 9 percent. It has floatation costs of 5 percent of the face value. The bond matures in 10 years. The firm’s average tax rate is 30 percent and its marginal tax rate is 21 percent. Compute the after-tax cost of debt.
2. Carraway Seed Company is issuing a $1,000 par value bond that pays 7 percent annual interest and matures in 15 years. Investors are willing to pay $850 for the bond. Floatation costs will be 3 percent of market value. The company is in a 21 percent tax bracket. What will be the firm’s after-tax cost of debt on the bond?
3. Sincere Stationary Corporation needs to raise $500,000 to improve its manufacturing plant. It has decided to issue a $1,000 par value bond with a 12 percent annual coupon rate and a 10 year maturity. If floatation costs are 10.5 percent of the market price, how many bonds will the firm have to issue to receive the needed funds?
Give an example of why a company like Sincere Stationary Corporation would issue debt at 12 percent interest in today’s interest rate environment?
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