Question

Bond issue costs reduce the cash proceeds from the issuance of debt. do not affect the cash proceeds from the issuance of debt. increase the effective interest rate of borrowing. increase the cash proceeds from the issuance of debt. decrease the effective interest rate of borrowing.

Answer 1

increase the effective interest rate of borrowing

Step-by-step explanation:

Cost of debt refers to the total cost a company incurs for raising debt which includes fixed coupon rate payments to bondholders.

Cost of debt is calculated using the following formula:

`K_(d) = (I(1\ -\ t))/(NP)`

wherein
`K_(d)` = Cost of debt

I = annual rate of coupon payment

t= tax rate

NP = Net proceeds which is par value less issue expenses

when NP is taken as the base, while calculating cost of debt, it is termed as effective interest rate.

So, bond issue costs reduce the net proceeds and thus, increase the effective interest rate of borrowing for the issuer company.