Question

Despite the fact that it is a cash cow, AAPL borrows from capital markets. In fact it has a bond outstanding that matures in 8 years. Par is $1,000 and the bond pays interest semi-annually. The bond is quoted at 93.6% of face value and carries a coupon rate at 3.7%. AAPL tax rate is 32%. What is AAPL after-tax cost of debt?

Answer 1

Given about AAPL's current bond,

Face value = $1000

coupon rate = 3.7% paid semiannually,

So, semiannual coupon payment = (3.7%/2) of 1000 = $18.50

years to maturity = 8

current price = 93.6% of face value = $936

Bonds' Yield can be calculated on financial calculator using following values:

FV = 1000

PV = -936

N = 2*8 = 16

PMT = 18.50

Compute for I/Y, we get I/Y = 2.334

=> YTM of the bond = 2*2.334 = 4.67%

For a company, its before-tax cost of debt equals to its bond's YTM

So, company's before-tax cost of debt Kd = 4.67%

Tax rate T = 32%

its after-tax cost of debt = Kd*(1-T) = 4.67*(1-0.32) = 3.17%