Question

JBL has a 20-year, 8% annual coupon bonds outstanding. If the bonds currently sell for 95% of $1000 par value and the firm pays an average tax rate of 35%, what will be the before-tax and after-tax component cost of debt?

Answer 1

Answer:

8.53% and 5.54%

Explanation:

In this question, we use the Rate formula which is shown in the spreadsheet.  

The NPER represents the time period.  

Given that,  

Present value = $1000 × 95% = $950

Assuming figure - Future value or Face value = $1,000  

PMT = 1,000 × 8% = $80

NPER = 20 years

The formula is shown below:  

= Rate(NPER;PMT;-PV;FV;type)  

The present value come in negative  

So, after solving this,  

1. The pretax cost of debt is 8.53%

2. And, the after tax cost of debt would be

= Pretax cost of debt × ( 1 - tax rate)

= 8.53% × ( 1 - 0.35)

= 5.54%