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Five Rivers Casino 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. Gamblers flotation expense on the new bonds will be $50 per bond. Gamblers marginal tax rate is 35%. What is the pre-tax cost of debt for the newly-issued bonds?
Weegy: According to the given information, Years to maturity = 15yrs Face value of the bond = $1000 annual coupon rate = 9% Market price of the bonds = $1070 Flotation cost on the new bonds = $50 per bond Tax rate = 35% For the newly issued bonds, [ the flotation expense per bond is $50 per bond. Therefore, the flotation expense should be deducted from the bond to compute the yield to maturity of the bond. MArket price of the bond = $1070 - $50 = $1020 Coupon payment = Face value * Annual coupon rate = $1000 * 9% = $90 Computing the YTM using the formula, YTM = Coupon payment + [ (Face value - Market price) / Years to maturity] - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - (Face value + Market price ) /2 = $90 + [ ($1000 - $1020) / 15] - - - - - - - - - - - - - - - - - ($1000 + $1020) / 2 = ($90 - $1.3) / $1010 = 0.0876 or 8.76% Therefore, the YTM os the bond is 8.76% The correct option is 8.76% ] (More)
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