Pricing securities
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Calculate the pre-tax cost of debt by finding the rate that sets the present value of the bond equal to the cash flows. Prior to issuing new bonds, use the market price. After you issue new bonds, you have to use the net value. The flotation cost is 10%, so the net value is 90% of the market prices
Market Price "Net Value
For current debt
(Market price minus flotation cost)"
For newly issued debt
Problem
Current Price of Bonds (20 year semiannual $60 coupon) $1,171.59
Pre-tax cost of debt (Use the Rate formula )
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