Question

# Suppose you are trying to estimate the after tax cost of debt for a firm as...

Suppose you are trying to estimate the after tax cost of debt for a firm as part of the calculation of the Weighted Average Cost of Capital (WACC). The corporate tax rate for this firm is 37%. The firm's bonds pay interest semiannually with a 5.7% coupon rate and have a maturity of 6 years. If the current price of the bonds is \$932.56, what is the after tax cost of debt for this firm? (Answer to the nearest tenth of a percent, e.g. 12.3%, but do not use a percent sign).

After tax cost of debt = 4.5%

 Using financial calculator BA II Plus - Input details: # FV = Future Value / Face Value = -\$1,000.00 PV = Present Value = \$932.56 N = Number of years remaining x frequency = 6 x 2 = 12 PMT = Payment = Coupon / frequency = 5.7%/2 x 1000 = -\$28.50 CPT > I/Y = Rate per period or YTM per period = 3.5499 Convert Yield in annual and percentage form = Yield*frequency / 100 = 7.100% After tax Cost of debt = YTM x (1-Tax) = 7.100% x (1-37%) = 4.5%

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