Before and aftertax cost of debt financing

label Business & Finance
account_circle Unassigned
schedule 1 Day
account_balance_wallet $5

Black Hill Inc. sells $100 million worth of 23-year to maturity 6.50% annual coupon bonds. The net proceeds (proceeds after flotation costs) are $985 for each $1,000 bond. What is the before-tax cost of capital for this debt financing?

Sep 23rd, 2015

Thank you for the opportunity to help you with your question!

before-tax cost of capital for this debt = Debt yield  - Cost of debt

Total yield = ($100,000,000)(1 + 0.065)^23

=424,638,573

Therefore each $1000 investment yielded 1000 *  424,638,573/ 100,000,000 = 4256

Thus before tax cost of capital debt = 4256 - 1000 - 985

= 2,271 for each $1000 bond.


Please let me know if you need any clarification. I'm always happy to answer your questions.
Sep 23rd, 2015

Thank you!!

Sep 24th, 2015

You are most welcome.

Sep 24th, 2015

I was looking through this question on my classroom list and it asks for a percent. 

Sep 24th, 2015

= 2271/1000 * 100 = 227.1%

Sep 24th, 2015

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