Sincere Stationery Corporation needs to raise $500,000 to improve its manufacturing plant. It has decided to issue a $1,000 par value bond with a 14 percent annual coupon rate and a 10-year maturity. The investors require a 9 percent rate of return.
Assume an 8 percent coupon rate. What effect does changing the coupon rate have on the firm's after-tax cost of capital?
Why is there a change?