Problem:
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.
Required:
Question 1: Compute the market value of the bonds.
Question 2: What will the net price be if flotation costs are 10.5 percent of the market price?
Question 3: How many bonds will the firm have to issue to receive the needed funds?
Question 4: What is the firm's after-tax cost of debt if its average tax rate is 25 percent and its marginal tax rate is 34 percent?
Note: Show supporting computations in good form.