Question

. A new bond issue is being issued at a market price of $922 with a 11.4% interest rate and will be due in 16 years. If the firm has a 32 percent tax rate, calculate the after-tax cost of debt.

Answer 1

Answer:

8.53%

Explanation:

Par value = $1000

Current bond = $922

Coupon = 1000*11.4% = $114

Years = 16

Pretax cost of debt = YTM(Nper, PMT, -PV, FV)

Pretax cost of debt = YTM(16, 114, -922, 1000)

Pretax cost of debt = 0.1255

Pretax cost of debt = 12.55%

After tax cost of debt = Pretax cost of debt * (1 - Tax rate)

After tax cost of debt = 12.55% * (1 - 32%)

After tax cost of debt = 0.1255 * 0.68

After tax cost of debt = 0.08534

After tax cost of debt = 8.53%