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2. Eight years ago, Intel Ltd issued 8 per cent irredeemable bonds at their par value...

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?

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Answer #1

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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