Sincere Stationery Corporation needs to raise ?$700,000 to improve its manufacturing plant. It has decided to issue a $1,000 par value bond with an annual coupon rate of 17 percent and a maturity of 16 years. The investors require a rate of return of 7 percent.
a. Compute the market value of the bonds.
b. What will the net price be if flotation costs are 11 percent of the market price?
c. How many bonds will the firm have to issue to receive the needed funds?
d. What is the firm's after-tax cost of debt if its average tax rate is 25 percent and its marginal tax rate is 35 percent?
e. Rework the problem as follows: Assume a coupon rate of 9 percent.
f. What effect does changing the coupon rate have on the firm's after-tax cost of capital? Why is there a change?