Tangshan Mining is considering issuing long-term debt. The debt would have a 30 year maturity and a 12 percent coupon rate and make semiannual coupon payments. In order to sell the issue, the bonds must be underpriced at a discount of 2.5 percent of face value. In addition, the firm would have to pay flotation costs of 2.5 percent of face value. The firm's tax rate is 33 percent. Given this information, the after tax cost of debt for Tangshan Mining would be

2. Tangshan Mining is considering issuing long-term debt. The debt would have a 30 year maturity and a 12 percent coupon rate and make semiannual coupon payments. In order to sell the issue, the bonds must be underpriced at a discount of 2.5 percent of face value. In addition, the firm would have to pay flotation costs of 2.5 percent of face value. The firm's tax rate is 33 percent. Given this information, what is the after tax cost of debt for Tangshan Mining?

11.17

12.76%

12.6% is the wrong answer.

Try 8.5%

8.552

To calculate the after-tax cost of debt for Tangshan Mining, we need to consider several factors.

1. Discount rate: The bonds are underpriced at a discount of 2.5% of face value. This means that the bonds will be sold at a price that is 2.5% lower than their face value. To calculate the discount amount, we can use the following formula:

Discount Amount = Face Value * Discount Rate
= Face Value * 2.5% = Face Value * 0.025

2. Flotation costs: The firm will incur flotation costs of 2.5% of face value to issue the bonds. Flotation costs are expenses incurred by a company during the process of issuing new securities.

Flotation Cost Amount = Face Value * Flotation Cost Rate
= Face Value * 2.5% = Face Value * 0.025

3. Net Proceeds: The net proceeds from issuing the bonds will be the face value minus the discount amount and flotation costs:

Net Proceeds = Face Value - Discount Amount - Flotation Cost Amount
= Face Value - (Face Value * 0.025) - (Face Value * 0.025)
= Face Value - (Face Value * 0.05)

4. Coupon payment: The bonds have a 12% coupon rate and make semiannual coupon payments. To calculate the coupon payment amount, we can use the following formula:

Coupon Payment Amount = Face Value * Coupon Rate / 2
= Face Value * 12% / 2
= Face Value * 0.12 / 2

5. Tax rate: The firm's tax rate is given as 33%. This means that the interest expense on the debt will be tax-deductible, reducing the after-tax cost.

6. After-tax Cost of Debt: The after-tax cost of debt can be calculated using the following formula:

After-tax Cost of Debt = (Coupon Payment Amount * (1 - Tax Rate) / Net Proceeds) + (Discount Amount / Net Proceeds)

Plug in the values:

After-tax Cost of Debt = (Face Value * 0.12 / 2 * (1 - 0.33) / (Face Value - (Face Value * 0.05)) + (Face Value * 0.025 / (Face Value - (Face Value * 0.05))

After simplifying the equation, we get:

After-tax Cost of Debt = 0.06 / (1 - 0.05) + 0.025 / (1 - 0.05)

After further calculations, the after-tax cost of debt for Tangshan Mining would be the resulting value from the equation above.