Question

5 years ago, Barton Industries issued 25-year noncallable, semiannual bonds with a $1,000 face value and an 8% coupon, semiannual payment ($40 payment every 6 months). The bonds currently sell for $847.87. If the firm's marginal tax rate is 25%, what is the firm's after-tax cost of debt? Do not round intermediate calculations. Round your answer to two decimal places.

Answer 1

The Approximate Yield to Maturity Formula =[Coupon + ( Face Value - Market Price) / Number of years to maturity] / [( Face Value + Market Price)/2 ] *100

= [$ 40+ ( $ 1,000- $ 847.87) /40] /[( $ 1,000+ $ 847.87)/2] *100

= 43.80325/923.935*100

= 4.74094498%

Annual YTm = 4.74094498%* 2

= 9.48%

Note :Semi Annual Coupon = Rate * Face Value

= 8% /2 * $ 1,000

= $ 40

Since this formula gives an approximate value, the financial calculators can be used alternatively.

where,

Par Value = $ 1,000

Market Price = $  847.87

Annual rate = 8% and

Maturity in Years = 20 Years

Payments = Semi Annual

Hence the yield to maturity = 9.74%

Now, the after tax cost of debt = Yield to Maturity * (1- tax Rate)

=9.74%*(1-25%)

= 7.31%

Answer = 7.31%