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?
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before-tax cost of capital for this debt = Debt yield - Cost of debt
Total yield = ($100,000,000)(1 + 0.065)^23
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.
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I was looking through this question on my classroom list and it asks for a percent.
= 2271/1000 * 100 = 227.1%
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