Gigawage Corp. is considering issuing a new 30-year debt isse that would pay an annual coupon of $85. Each bond in the issue would carry a $1,000 par value and would be expected to be sold for a price equal to its par value. Gigawage Corp's CFO has pointed out that the firm would incure a flotation cost of 3% when initially issuing the bond issue. Remember that the flotation costs will be _________ (added or subtracted) from the amount the firm will receive from issuing its new bonds. The firm's marginal federal-plus-state tax rate is 40%.
To see the effect of flotation costs on the after-tax-cost of debt, calculate the after-tax cost of the firm's debt issue with and without flotation costs.
After-tax cost of debt without flotation cost
A. 4.8450%
B. 4.3350%
C. 5.3550%
D. 5.1000%
After-tax cost of debt with flotation cost
A. 5.5355%
B. 5.7991%
C. 5.2791%
D. 6.0627%
This is the cost of ___________(new, embedded) debt, and is different from the average cost of capital raised in the past.