DQZ Telecom is considering a project for the coming year, which will cost $50 million. DQZ plans to use the flowing combination of debt and equity to finance the investment.

-          Issue $15 million of 20-year bonds at a price of 101, with a coupon rate of 8%, and flotation costs of 2% of par

-          Use $35 million of funds generated from earning

The equity market is expected to earn 12 percent. U.S. Treasury bonds are currently yielding 5 percent. The beta coefficient for DQZ is estimated to .60. DQZ is subject to an effective corporate income tax rate of 40%.

The before-tax cost of DQZ planned debt financing, net of flotation costs, in the first year is:

a.       11.80 percent

b.      9.08 percent

c.       10.00 percent

d.      7.92 percent

The answer is b. The explanation uses kdt formula

 kdt=[I+(PV-Nd)/n]/[(Nd+PV)/2],

and Nd(net proceeds) is  $14,850,000. Who could tell me how Nd is calculated? I just cant fighure out;(  Appreciated!

Issue Proceeds - Flotation costs

(15million x 1.01) - (2% x 15million)

15,150,000 - 300,000

Net issue proceeds = 14,850,000