Explore BrainMass

Explore BrainMass

    After-Tax Cost of Financing

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    .Drywall Systems, Inc., is presently in discussions with its investment bankers regarding the issuance of new bonds. The investment banker has informed the company that different maturities will carry different coupon rates and sell at different prices. Drywall Systems must choose among several alternatives. In each case, the bonds will have a $1,000 par value and flotation costs will be $30 per bond. This implies that the firm will net $970 per bond, before the adjustment for the premium (+) or discount (-). The company is taxed at a rate of 40%. Calculate the after-tax costs of financing with each of the following alternatives.

    Alternative Coupon Rate Time to Maturity Premium/ Discount (-)
    A 9% 16 years + $250
    B 7% 5 years + $50
    C 6% 7 years Par
    D 5% 10 years - $75.

    © BrainMass Inc. brainmass.com June 4, 2020, 1:12 am ad1c9bdddf
    https://brainmass.com/business/bond-valuation/after-tax-cost-financing-385330

    Solution Preview

    Please see the attachment.

    Drywall Systems, Inc., is presently in discussions with its investment bankers regarding the issuance of new bonds. The investment banker has informed the company that different maturities will carry different coupon rates and sell at different prices. Drywall Systems must choose among several alternatives. In each case, the bonds will have a $1,000 par value and ...

    Solution Summary

    The solution determines the after-tax cost of financing.

    $2.19

    ADVERTISEMENT