Question

Dell 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. Dell's flotation expense on the new bonds will be $50 per bond. Dell's marginal tax rate is 35%. What is the pre-tax cost of debt for the newly-issued bonds

Answer 1

8.76%

Step-by-step explanation:

The computation of the pre-tax cost of debt is as follows:

Market price of the bond is

= $1,070 - $50

= $1,020

Coupon payment = Face value × Annual coupon rate

= $1,000 × 9%

= $90

Now YTM would be

Given that

NPER = 15

PMT = $90

PV = $1,020

FV = $1,000

The formula is given below:

=RATE(NPER;PMT;-PV;FV;TYPE)

After applying the above formula, the yield to maturity is 8.76%