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Prince Company is contemplating a bond issue at par with the following terms. What is the...

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.

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Answer #1

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.

Hope I am able to solve your concern. If you are satisfied hit a thumbs up !!

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