Crandal Dockworks is undergoing a major expansion.The expansion will be financed by issuing new 15-year,$1,000 par,9% annual coupon bonds.The market price of the bonds is $1,070 each.Crandal's flotation expense on the new bonds will be $50 per bond.Crandal's marginal tax rate is 35%.What is the pre-tax cost of debt for the newly-issued bonds?

Question

Quizplus · Accepted Answer

The pre-tax cost of debt can be calculated using the formula for the yield to maturity (YTM) on a bond, which takes into account the annual coupon payments, the face value, the price of the bond, and the number of years until maturity. Given that the bonds have a $1,000 par value, a 9% annual coupon ($90 per year), are sold for $1,070 each, and have a flotation expense of $50 (effectively making their sale price $1,020), the cost of debt is the rate that equates the net proceeds from the bond sale to the present value of its cash flows. The correct answer, 8.76%, reflects the yield that balances these factors, without the need for detailed calculation in this format.

Crandal Dockworks Is Undergoing a Major Expansion