Tangshan Mining Is Considering Issuing Long-Term Debt

question 39

Multiple Choice

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 ________.

• A) 6.38%
• B) 12.76%
• C) 4.98%
• D) 8.48%

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Definitions:

Least Squares Regression

A statistical method used to determine the line of best fit by minimizing the sum of squares of the vertical distances of the points from the line.

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Sum Of Squares

A statistical measure used to describe the dispersion or variation of a set of data points by squaring their deviations from the mean.

Standard Error

A statistical measure that estimates the accuracy with which a sample distribution represents a population by using the standard deviation.