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Question: currently warren industries can sell 15year 1000parvalue bonds paying annual...

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Currently, Warren Industries can sell 15-year, $1,000-par-value bonds paying annual interest at a 12% coupon rate. As a result of current interest rates, the bonds can be sold for $1,010 each; flotation costs of $30 per bond will be incurred in this process. The firm is in the 40% tax bracket.

  1. Calculate the before-tax and after-tax costs of debt.
  2. Use the approximation formula to estimate the before-tax and after-tax costs of debt.
  3. Compare and contrast the costs of debt calculated in parts c and d. Which approach do you prefer? Why?
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