The problem describes a scenario where Qatar Airways is raising funds through a mix of equity and debt. The goal is to calculate the firm's before-tax and after-tax cost of debt, given information about the bond issued, its coupon rate, maturity, selling price, flotation costs, and the company's tax rate.

1. Problem Description

The problem describes a scenario where Qatar Airways is raising funds through a mix of equity and debt. The goal is to calculate the firm's before-tax and after-tax cost of debt, given information about the bond issued, its coupon rate, maturity, selling price, flotation costs, and the company's tax rate.

2. Solution Steps

First, we need to calculate the before-tax cost of debt. Since we are given the bond's selling price, coupon rate, maturity, and flotation costs, we can approximate the before-tax cost of debt using the yield-to-maturity (YTM) concept. However, we can also approximate it by considering the annual interest payment and the net proceeds from the bond sale.

The annual interest payment is the coupon rate multiplied by the face value of the bond:

$Annual\ Interest\ Payment = Coupon\ Rate * Face\ Value = 0.07 * 1000 = 70$

The net proceeds from the bond sale are the selling price minus the flotation costs:

$Net\ Proceeds = Selling\ Price - Flotation\ Cost = 955 - 3 = 952$

We can approximate the before-tax cost of debt as:

$Before-tax\ Cost\ of\ Debt = \frac{Annual\ Interest\ Payment}{Net\ Proceeds} = \frac{70}{952} \approx 0.0735$

Converting to percentage:

$Before-tax\ Cost\ of\ Debt = 0.0735 * 100 = 7.35\%$

Next, we calculate the after-tax cost of debt using the following formula:

$After-tax\ Cost\ of\ Debt = Before-tax\ Cost\ of\ Debt * (1 - Tax\ Rate)$

Given the tax rate of 40% (or 0.40), we have:

$After-tax\ Cost\ of\ Debt = 0.0735 * (1 - 0.40) = 0.0735 * 0.60 = 0.0441$

Converting to percentage:

$After-tax\ Cost\ of\ Debt = 0.0441 * 100 = 4.41\%$

3. Final Answer

The firm's before-tax cost of debt is 7.35%.

The firm's after-tax cost of debt is 4.41%.