problem on Before-tax cost

Business & Finance
Tutor: None Selected Time limit: 1 Day

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?

Round the answer to two decimal places in percentage form.

Sep 25th, 2015

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

We have the following inputs:

PV= -98,500,000

FV= 100,000,000

Nper= 23

Pmt=6,500,000

Using excel formula for Rate(Nper,Pmt,PV,FV), we get  6.63% This is the before tax cost of capital

Please let me know if you need any clarification. I'm always happy to answer your questions.
Sep 25th, 2015

How would you find out the after tax cost? Thanks

Sep 28th, 2015

After tax cost of debt= cost of debt*(1-tax rate)

for example, if tax rate is 35%, in our case, after tax cost would be 6.63%* 65%= 4.31%

Sep 28th, 2015

okay. could you help me with a similar problem?

Sep 28th, 2015

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