Currently, Warren Industries issued 15-year, $1000 par-value bonds paying annual interest at a 12% coupon rate. As a result of the current interest rate, the bonds would sell for $980 each. The firm is in the 40% tax bracket. Calculate the before-tax cost and after-tax cost of the bond. A. 12.30%, 6.75% B. 12.30%, 7.38% C. 10.30%, 6.38% D. 13.50%, 7.38%\

B. 12.30%, 7.38%

Explanation:

Cost of debt - the return that a company provides to its debt-holders and creditors

PV = present value = current value of future cash flow

FV = future value

CF = cash flow

R = payment

r = rate of interest

n = number of payments

Cash flows from the firm’s point of view over the maturity of the bond

= 980

= - 120

= - 1000

Before Tax

Net proceeds =

Cash Flows = CF = - 120

n = 15

FV = - 1000

r = 12.30%

After Tax

After-Tax Cost of Debt  = Before-Tax Cost of Debt × (1 – Tax Rate)

40%

= 12.30 (1 - 0.4)

= 7.38%

answer; /// the use of a bank credit card to make purchase;

answer; purpose nondisclosure;