Nico Trading Corporation is considering issuing long-term debt. The debt would have a 30 year maturity and a 10 percent coupon rate. In order to sell the issue, the bonds must be underpriced at a discount of 5 percent of face value. In addition, the firm would have to pay flotation costs of 5 percent of face value. The firm's tax rate is 35 percent. Given this information, the after tax cost of debt for Nico Trading would be 11.17 percent.

Question

Quizplus · Accepted Answer

The after-tax cost of debt is calculated using the formula: (Coupon Rate * (1 - Tax Rate)) / (1 - Discount - Flotation Costs). Plugging in the values: (10% * (1 - 0.35)) / (1 - 0.05 - 0.05) = 6.5% / 0.9 = 7.22%, not 11.17%.

Nico Trading Corporation Is Considering Issuing Long-Term Debt