Nico Trading Corporation is considering issuing long-term debt. The debt would have a 30 year maturity and a 10 percent coupon rate. In order to sell the issue, the bonds must be underpriced at a discount of 5 percent of face value. In addition, the firm would have to pay flotation costs of 5 percent of face value. The firm’s tax rate is 35 percent. Given this information, the after tax cost of debt for Nico Trading would be
A. 7.26%.
B. 11.17%.
C. 10.00%.
D. none of the above
Answer:A
Nico Trading Corporation is considering issuing long-term debt. The debt would have a 30 year maturity and a 10 percent coupon rate. In order to sell the issue, the bonds must be underpriced at a discount of 5 percent of face value. In addition, the firm would have to pay flotation costs of 5 percent of face value. The firm’s tax rate is 35 percent. Given this information, the after tax cost of debt for Nico Trading would be
A. 7.26%. B. 11.17%. C. 10.00%. D. none of the above