Question

Himiny's Cricket Farm Issued a 26-year, 14 percent semiannual bond 4 years ago. The bond currently sells for 96 percent of its face value. The company's tax rate is 31 percent. What is the aftertax cost of debt? (Do not round intermediate calculations. Enter your answer as a percentage, omit the "%" sign in your response, and round your answer to 2 decimal places. For example, 0.12345 or 12.345% should be entered as 12.35.) Please provide a step-by-step solution so I can follow along and figure out how to do it. Thanks!

Answer 1

Face Value = $1,000

Current Price = 96%*$1,000
Current Price = $960

Annual Coupon Rate = 14%
Semiannual Coupon Rate = 7%
Semiannual Coupon = 7%*$1,000
Semiannual Coupon = $70

Time to Maturity = 22 years
Semiannual Period to Maturity = 44

Let Semiannual YTM be i%

$960 = $70 * PVIFA(i%, 44) + $1,000 * PVIF(i%, 44)

Using financial calculator:
N = 44
PV = -960
PMT = 70
FV = 1000

I = 7.306%

Semiannual YTM = 7.306%
Annual YTM = 2 * 7.306%
Annual YTM = 14.612%

Before-tax Cost of Debt = 14.612%
After-tax Cost of Debt = 14.612% * (1 - 0.31)
After-tax Cost of Debt = 10.08%