What is the pre-tax cost of debt for Prescott Corporation's bond if the market rate is 10% and flotation costs amount to $50?

To find the pre-tax cost of debt for Prescott Corporation's bond, we need to consider both the market rate of the bond and any flotation costs associated with issuing the bond. The market rate reflects the return that investors demand for the bond, which is given as 10%. Flotation costs are the expenses incurred when issuing the bond, and in this case, they amount to $50.

When calculating the cost of debt, we typically adjust the market rate for flotation costs, as these costs effectively increase the total amount that needs to be generated to cover the debt. If we assume that the bond is issued at par value (face value), the flotation cost impacts the effective yield on the bond.

In this scenario, we can compute the effective cost in the following steps:

1. If the bond were issued at its face value, the coupon payment expected would be based on the 10% market rate on the face value of the bond.
2. However, the flotation cost decreases the actual proceeds the company receives from the bond issuance. For example, if the bond has a nominal value of $1,000 and there is a flotation cost of $50, then the net proceeds the company effectively receives from the bond would be $1,000 -