XRT, Inc is issuing a 1,000 par value bond that pays 8.5 interest annually. Investors are expected
to pay 1,100 for the 12-year bond. The firm will pay 50 per bond in flotation costs.
What is the
after-tax cost of new debt if the firm is in the 35 tax bracket?
A) 4.70 B) 8.23 C) 7.45 D) 4.55
Question 2
A new machine can be purchased for 1,200,000. It will cost 35,000 to ship and 15,000 to modify
the machine.
A 12,000 recently completed feasibility study indicated that the firm can employ an
existing factory owned by the firm, which would have otherwise been sold for 180,000. The firm
will borrow 750,000 to finance the acquisition. Total interest expense for 5-years is expected to
approximate 350,000. What is the investment cost of the machine for capital budgeting purposes?
A) 1,430,000 B) 2,180,000 C) 1,442,000 D) 1,780,000
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