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Calculate the before-tax and after-tax costs of debt

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Question - Cost of debt using both methods Currently, Jackson Real Estate Inc. can sell 10-year, $100-par-value bonds paying annual interest at a 6% coupon rate. Jackson can sell its bonds for $106.20 each. Jackson will incur flotation costs of $2.50 per bond in this process. The firm is in the 25% tax bracket.

a. Find the net proceeds from sale of the bond, Nd.

b. Show the cash flow from the firm's point of view over the maturity of the bond.

c. Calculate the before-tax and after-tax costs of debt.

d. Use the approximation formula to estimate the before-tax and after-tax costs of debt.

e. Compare the costs of debt calculated in parts c and d. Which approach do you prefer? Why?

Reference no: EM133104701

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