The Pathway Company needs to raise $100 million to modernize its current facility and management has decided to raise

Question

The Pathway Company needs to raise $100 million to modernize its current facility and management has decided to raise the funds with a bond issue. Potential investors currently require a 10.50 percent rate of return. The bond specifics are: (1) $1,000 face value, (2) 9.00 percent coupon rate, (3) Semi-annual coupons, (4) 10-year maturity, and (5) $55 per bond in flotation costs. Calculate the company's cost of capital for this bond issuance.

Help In Homework · Accepted Answer

K = Nx2 Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k] + Par value/(1 + YTM/2)^Nx2 k=1 K =10x2 Bond Price =∑ [(9*1000/200)/(1 + 10.5/200)^k] + 1000/(1 + 10.5/200)^10x2 k=1 Bond Price = 908.48 Using Calculator: press buttons "2ND"+"FV" then assign PMT = Par value * coupon %/coupons per year=1000*9/(2*100) I/Y =10.5/2 N =10*2 FV =1000 CPT PV Using Excel =PV(rate,nper,pmt,FV,type) =PV(10.5/(2*100),2*10,-9*1000/(2*100),-1000,) Cost of debt K = Nx2 Bond Price -flotation cost =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k] + Par value/(1 + YTM/2)^Nx2 k=1 K =10x2 908.48-55 =∑ [(9*1000/200)/(1 + YTM/200)^k] + 1000/(1 + YTM/200)^10x2 k=1 YTM = 11.50

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The Pathway Company needs to raise $100 million to modernize its current facility and management has decided to raise the funds with a bond issue

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