Corporate Finance: Long Term Debt
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A8. (Domestic versus Eurobond borrowing costs) A firm can issue an eight-year public debt issue at par with an 11% coupon in the domestic market. It can also issue 11.25%Eurobonds. If all other expenses are equal, which issue offers the firm the lower borrowing
cost?
C1. (Cost of borrowing) A firm issues a 10-year debt obligation that bears a 12% coupon rate and gives the investor the right to put the bond back to the issuer at the end of the fifth year
at 103% of its face amount. The issue has no sinking fund. Interest is paid semiannually.
The issuer's tax rate is 34%.
a. Calculate the after-tax cost of debt, assuming the debt remains outstanding until maturity.
b. Calculate the after-tax cost of debt, assuming investors put the bond back to the firm at the end of the fifth year. (Note: Any unamortized issuance expenses and any redemption premium can be deducted for tax purposes in the year of redemption.)
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The solution examines corporate finance and long term debts.
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