Mahim Corp. Has Issued 2,500 Debentures With A Total Principal Value Of Tk. 25,00,000. The Bonds Have A Coupon Interest Rate Of 7%.

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Mahim Corp. has issued 2,500 debentures with a total principal value of Tk. 25,00,000. The bonds have a coupon interest rate of 7%.
a. What dollar amount of interest per bond can an investor accept to receive each year from Mahim Corp.
b. What is the Mahims total interest expense per year associated with this bond issue?
C. Assuming that Mahims in a 35% Corporate tax bracket, what is that company’s net after-tax interest cost associated with this bond issue?

Here are the step-by-step solutions to the three parts of your question:

Given Information:

a. Interest Amount Per Bond Per Year

An investor holding one bond receives the coupon rate applied to the par value of that bond:

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Answer: An investor can expect to receive Tk. 70 in interest per bond each year.

b. Total Annual Interest Expense

The total annual interest expense for Mahim Corp. is the coupon rate applied to the total principal value of the bond issue:

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Answer: Mahim Corp.’s total interest expense associated with this bond issue is Tk. 1,75,000 per year.

c. Net After-Tax Interest Cost

Since interest expense is tax-deductible, the corporate tax shield reduces the effective cost of debt for the firm:

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Answer: Mahim Corp.’s net after-tax interest cost is Tk. 1,13,750 per year.

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