Question

(Cost of debt) Sincere Stationery Corporation needs to raise $500,000 to improve its manufacturing plant. It has decided to issue a $1,000 par value bond with a 14 percent annual coupon rate and a 10-year maturity. The investors require a 9 percent rate of return. a. Compute the market value of the bonds. b. What will the net price be if flotation costs are 10.5 percent of the market price?

Answer 1

Answer:

a. $1,320.88

b.  $1,182.19

Explanation:

The computation is shown below:

a. For market value of the bond

Given that

Rate = 9%

NPER = 10

PMT = $1,000 * 14% = $140

FV = $1,000

The formula is shown below:

= -PV(RATE;NPER;PMT;FV;TYPE)

After applying the above formula, the present value is $1,320.88 i.e. equivalent to the market value of the bonds

b. Now the net price be

= Market price × (1 - flotation cost)

= $1,320.88 × (1 - 0.105)

= $1,182.19