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Delta Corp has 6.5% coupon semiannual bonds outstanding (face value of $1000), with 10 years left...

Delta Corp has 6.5% coupon semiannual bonds outstanding (face value of $1000), with 10 years left to maturity, and a price of $840. The firm’s marginal tax rate is 25%. Delta’s marginal post-tax cost of debt is estimated to be:

6.98%

6.46%

6.54%

6.30%

6.72%
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Homework Answers

Answer #1

Current Price = 840

Coupon 6.5%

Maturity = 10 years

Let's assume the YTM be 8%

Value of Bond =

=

= 898.072552397

Now,

Let's assume the YTM be 9%

Value of Bond =

=

= 837.400794332

YTM =

= 8% + ((898.072552397 - 840) / (898.072552397 - 840) + (840 - 837.400794332)) * (10-9)

= 8% + (0.9129522125 / 4.8351939059) * 1

= 8% + 0.96%

= 8.96%

After tax Cost of Debt = 8.96 (1-0.25) = 6.72%

Option E is correct.

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