Problem:
Drywall Systems, Inc., is presently in discussions with its investment bankers regarding the issuance of new bonds. The investment banker has informed the company that different maturities will carry different coupon rates and sell at different prices. Drywall Systems must choose among several alternatives. In each case, the bonds will have a $1,000 par value and flotation costs will be $30 per bond. This implies that the firm will net $970 per bond, before the adjustment for the premium (+) or discount (-). The company is taxed at a rate of 40%. Calculate the after-tax costs of financing with each of the following alternatives.
Alternative Coupon Rate Time to Maturity Premium/ Discount (-)
A 9% 16 years + $250
B 7% 5 years + $50
C 6% 7 years Par
D 5% 10 years - $75