Five Rivers Casino 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.Gamblers flotation expense on the new bonds will be $50 per bond.Gamblers 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 is the yield to maturity (YTM) on the bonds. The bonds have a coupon rate of 9%, a market price of $1,070, and a par value of $1,000. The YTM can be calculated using the formula for the yield on a bond, which considers the annual coupon payment, the difference between the par value and the market price, and the number of years to maturity. The calculation results in approximately 8.76%.

Five Rivers Casino Is Undergoing a Major Expansion