Question

First Solar, Inc. provides photovoltaic (PV) solar energy solutions in the United State, Japan, France, Canada, India, Australia, and internationally. The company designs, manufactures, and sells cadmium telluride solar modules that converts sunlight into electricity. It serves developers and operators of systems, utilities, independent power producers, commercial and industrial companies, and other system owners. Founded in 1999, First Solar is a leading American solar technology company and global provider of responsibly produced eco-efficient solar modules advancing the fight against climate change. The company is unique among the world’s ten largest solar manufacturers for being the only US-headquartered company and not manufacturing in China. First Solar’s advanced thin film photovoltaic (PV) modules represent the next generation of solar technologies, providing a competitive, high-performance, lower-carbon alternative to conventional crystalline silicon (c-Si) PV panels.

A brief history of solar power In 1954, Bell Labs developed the first silicon photovoltaic cell. Although solar energy had previously been captured and converted into usable energy through various methods, only after 1954 did solar power begin to become a viable source of electricity to power devices over extended periods of time.
The decision to use so much debt financing for the project was largely due to the fact the stock price of the company had decreased substantially and has used relatively small debt in its operation. In fact, the company has only $313.20 million debt relative to its market cap of $17.59 billion. Debt Financing The company currently has one issue of bonds outstanding. The bonds have a par value of $1,000 per bond, carry an 8 percent coupon rate of interest, have 14 years to maturity, and are selling for $1,050. First Solar’s common stock has a current market price of 165.01with beta of 1.33. The current risk-free rate based on 10-years Treasury Bonds is 3.34% and market risk premium of 6%.
a. What is the cost of new debt financing to First Solar based on current market prices after both taxes (you may use a 30 percent marginal tax rate for your estimate) and flotation costs of $30 per bond have been considered?

Answer 1

The after-tax cost of new debt financing for First Solar, considering an 8% coupon bond selling for $1,050 with flotation costs of $30 and a 30% tax rate, is approximately 5.49%.

Step-by-step explanation:

The cost of new debt financing for First Solar can be calculated using the current yield to maturity (YTM) of its outstanding bonds. Considering a bond selling for $1,050 with a par value of $1,000, an 8% coupon rate, and 14 years to maturity, we need to compute the after-tax cost of debt taking into account the marginal tax rate and flotation costs.

The formula to calculate the after-tax cost of debt is:

Cost of Debt = (Annual Interest Payment / Net Proceeds from Bond) * (1 - Tax Rate)

Where:

• Annual Interest Payment = Coupon Rate * Par Value
• Net Proceeds from Bond = Sale Price - Flotation Cost
• Tax Rate = Marginal Tax Rate

Plugging in the values:

• Annual Interest Payment = 0.08 * $1,000 = $80
• Net Proceeds from Bond = $1,050 - $30 = $1,020
• Tax Rate = 30%

The cost of new debt before taxes would be:

Cost of Debt (before taxes) = $80 / $1,020 ≈ 7.84%

After incorporating the tax benefit:

Cost of Debt (after taxes) = 7.84% * (1 - 0.30) ≈ 5.49%

Therefore, the after-tax cost of new debt financing for First Solar, when accounting for flotation costs, is approximately 5.49%.