Question

Cost of debt with fees. Kenny Enterprises will issue a bond with a par value of ​$1,000, a maturity of twenty​ years, and a coupon rate of 7.5 ​% with semiannual​ payments, and will use an investment bank that charges ​$25 per bond for its services. What is the cost of debt for Kenny Enterprises at the following market​ prices?

a. ​$982.48
b. ​$1,004.93
c. ​$1,068.15
d. ​$1,171.91

Answer 1

Kenny Enterprises

Cost of Debt with fees:

Market Prices $982.48 $1,004.93 $1,068.15 $1,171.91

Cost of debt (b- a) $48.59 $26.14 ($37.08) ($140.84)

Cost of debt in percentage 4.86% 2.61% -3.71% -14.08%

Step-by-step explanation:

a) Data and Calculations:

Market Prices $982.48 $1,004.93 $1,068.15 $1,171.91

Investment bank charges 25.00 25.00 25.00 25.00

a) Net bonds proceeds $957.48 $979.93 $1,043.15 $1,146.91

b) Repayments:

PV of interest payments $770.66 $770.66 $770.66 $770.66

PV of principal ($1,000) 235.41 235.41 235.41 235.41

Total repayments $1,006.07 $1,006.07 $1,006.07 $1,006.07

Cost of debt (b- a) $48.59 $26.14 ($37.08) ($140.84)

Cost of debt in percentage 4.86% 2.61% -3.71% -14.08%

Present values of interest payments:

N (# of periods) 40

I/Y (Interest per year) 7.5

PMT (Periodic Payment) 37.5

FV (Future Value) 0

Results

PV = $770.66

Sum of all periodic payments $1,500.00

Total Interest $729.34

Present value of principal repayment:

N (# of periods) 20

I/Y (Interest per year) 7.5

PMT (Periodic Payment) 0

FV (Future Value) 1000

Results

PV = $235.41

Total Interest $764.5