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J&B Cost of Debt

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J & B Inc. has $5 million of new debt to finance a project with a coupon rate of 12%, paid semiannually and has a par value of $1,000. The bonds will mature in 14 years and are priced at $850, net of flotation costs. If the firm's tax rate is 40%, what is the the cost of debt to J & B (Round to the nearest whole percentage).

a. 9%
b. 11%
c. 13%
d. 15%.

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Solution Summary

This solution shows step-by-step calculations and brief explanations to determine the cost of debt to J & B using the tax rate, coupon rate, time and par value.

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The value of bond = C/r(1-1/(1+r)^t)+F(1+r)^t
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