New Jet Airlines plans to issue 14-year bonds with a par value of $1,000 that will pay $60 every six months. The
bonds have a market price of $1,220. Flotation costs on new debt will be 4% of the selling price.
If the firm has a
35% marginal tax bracket, compute the following:
a. Yield to maturity of debt
b. After-tax cost of existing debt
c. After-tax cost of new debt
a. YTM = 9.18% (Using Yield Function in Excel with rate =.12, Pr = 122, Redemption = 100, Frequency = 2, and Basis
= 0)
b. After-tax cost of debt = 9.18% × (1-.
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