(Cost of debt) Microfinance Company needs to raise $800,000 to improve the position of cash. It has decided to issue a $1,000 par value bond with 15 percent annual coupon rate and 5-year maturity. The investors require 16 percent rate of return.
a. Compute the market value of bonds.
b. What will the net price if the floatation cost is 5 percent of the market price?
c. How many bonds will the company have to issue to receive $800,000?
d. What is the company’s after-tax cost of debt if the average tax rate is 20 percent and the marginal tax rate is 30 percent?