2. Eight years ago, Intel Ltd issued 8 per cent irredeemable bonds at their par value of £100. The current market price of these bonds is £92. If the company pays corporate tax at a rate of 30 per cent, what is its current cost of debt of the bonds?
Current cost of debt is 6.09%
Coupon Interest | = | Par Value | * | Coupon Rate | ||
= | 100 | * | 8% | |||
= | 8 | |||||
Before tax cost of debt | = | Annual coupon | / | Current Price | ||
= | 8 | / | 92 | |||
= | 8.70% | |||||
After tax cost of debt | = | Before Tax cost of debt*(1- Tax Rate) | ||||
= | 8.70% | * (1- 0.30) | ||||
= | 6.09% | |||||
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