Question: Cost of debt using both methods 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. Find the net proceeds from sale of the bond, \(N_{d}\).
2. Show the cash flows from the firm's point of view over the maturity of the bond.
3. Calculate the before-tax and after-tax costs of debt.
4. Use the approximation formula to estimate the before-tax and after-tax costs of debt.
5. Compare and contrast the costs of debt calculated in parts c and d. Which approach do you prefer? Why?

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