Question

Galvatron Metals has a bond outstanding with a coupon rate of 6.3 percent and semiannual payments. The bond currently sells for $949 and matures in 25 years. The par value is $1,000 and the company's tax rate is 39 percent. What is the company's aftertax cost of debt

Answer 1

Answer:

The right response is "4.102%".

Explanation:

Given:

Number of half years,

n = $25\times 2$

  = $50$

Coupon per half years,

c = $1000\times \frac{6.3 \ percent}{2}$

  = $31.5$

Price,

pv = 949

Par value,

= 1000

Now,

The YTM will be:

= $rate(n,c,-pv,fv)\times 2$

= $rate(50,31.5,-949,1000)\times 2$

= $6.724$ (%)

hence,

After tax cost of debt will be:

= $YTM\times (1-tax \ rate)$

= $6.724\times (1-39)$

= $4.102$ (%)