Question

Stancorp has a $ 14.9 million debt issue​ outstanding, with a 6.1 % coupon rate. The debt has​ semi-annual coupons, with the next coupon is due in six months. The debt matures in five years. It is currently priced at 93 % of par value.

a. What is​ Stancorp's pre-tax cost of​ debt? Note: Compute the effective annual return.

b. If Stancorp faces a 30 % tax​ rate, what is its​ after-tax cost of​ debt?

Answer 1

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Answer:

a)

Since the debt is currently priced at 93% of par value, its current price is $14.9 million * 0:93 = $13.857 million. The semiannual coupons for the bond are: $14.9Mn*0.061/2 = $454,450

Then the yield of maturity (y) is given by

RATE function in excel or Using a financial calculator

Nper = 5*2 = 10

PV = 13,857,000

FV = 14,900,000

PMT = -454450

= RATE(10,- 454450, 13,857,000, -14,900,000) = 3.909%

EAR = (1+3.909%)^2 -1

= 7.9711%

b)

The after-tax cost of debt for Avicor is:

(1 - TC)rD

= (1-0.3)*0.079711 = 5.580%