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%
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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