Question

Suppose we have a bond issue currently outstanding that has 25 years left to maturity. The...

Suppose we have a bond issue currently outstanding that has 25 years left to maturity. The coupon rate is 9%, and coupons are paid semiannually. The bond is currently selling for $908.72 per $1,000 bond. What is the after-tax cost of debt if the tax rate is 45%?

A. 3.25% B. 5.50% C. 6.50% D. 7.75% E. 10.00%

Homework Answers

Answer #1

B. 5.50%

After-tax cost of debt = Before-tax cost of debt*(1- Tax Rate)
= 10.00% * (1- 0.45)
= 5.50%
Working:
Before tax cost of debt =rate(nper,pmt,pv,fv)*2
= 10.00%
Where,
nper = Number of period = 25*2 = 50
pmt = Coupon Payment = 1000*4.5% = $       45.00
pv = Price of bond = $   -908.72
fv = Face Value = $ 1,000.00
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