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Find the net proceeds from sale of the bond

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Currently, Warren Industries can sell 15-year, $1,000-par-value bonds paying annual interest at a 7% coupon rate. Because current market rates for similar bonds are just under 7%, Warren can sell its bonds for $1,010 each; Warren will incur flotation costs of $30 per bond in this process. The firm is in the 40% tax bracket.

  • Find the net proceeds from sale of the bond, Nd.
  • Show the cash flows from the firm's point of view over the maturity of the bond.
  • Calculate the before-tax and after-tax costs of debt.
  • Use the approximation formula to estimate the before-tax and after-tax costs of debt.
  • Compare and contrast the costs of debt calculated in parts c and d. Which approach do you prefer? Why?

Reference no: EM132364692

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