Question

Dice Casino sold a 15-year bond last week for $955. after issuance cost, C Casino received $948. the face value of bond is $1000 and 7 percent coupon rate, paid annually. What is the after tax cost of debt for the bond, given 40% tax rate?

Group of answer choices

3.55%

4.55%

5.55%

6.55%

Answer 1

Answer is 4.55%

Face Value = $1,000
Net Proceed = $948

Annual Coupon Rate = 7.00%
Annual Coupon = 7.00% * $1,000
Annual Coupon = $70

Time to Maturity = 15 years

Let Annual YTM be i%

$948 = $70 * PVIFA(i%, 15) + $1,000 * PVIF(i%, 15)

Using financial calculator:
N = 15
PV = -948
PMT = 70
FV = 1000

I = 7.59%

Annual YTM = 7.59%

Before-tax Cost of Debt = 7.59%

After-tax Cost of Debt = Before-tax Cost of Debt * (1 - Tax Rate)
After-tax Cost of Debt = 7.59% * (1 - 0.40)
After-tax Cost of Debt = 4.55%