Prince Company is contemplating a bond issue at par with the following terms. What is the after tax cost of debt? 20 years, 9 % coupon, par value $1000. Flotation costs $40. Show work.
After Tax Cost of Debt is calculated as below :
Par Value (fv) = $ 1,000
Price after flotation cost (pv) = 1000 - 40
= $ 960
Coupon rate = 9%
Coupon Payments (pmt) = 9% * 1000
= $ 90
Time period (nper) = 20 years
Using the Excel sheet calculator with the formula below, we can calculate the yield to maturity of the bond as :
=RATE(nper,pmt,-pv,fv)
=RATE(20,90,-960,1000)
= 9.4524%
Now Cost of debt = Yield to Maturity * ( 1 - tax rate )
= 9.4524 * ( 1 - 35% )
= 6.144%
**Please note that as there is no details of the tax rate given, I am considering the Tax rate to be 35%
Just use the tax rate which ever applicable in the formula where I have used 35% to reach the desired result.
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