Question

5 years ago, Barton Industries issued 25-year noncallable, semiannual bonds with a $1,000 face value and a 11% coupon, semiannual payment ($55 payment every 6 months). The bonds currently sell for $844.87. If the firm's marginal tax rate is 25%, what is the firm's after-tax cost of debt?

Answer 1

Answer:
Face Value = $1,000
Current Price = $844.87

Annual Coupon Rate = 11%
Semiannual Coupon Rate = 5.50%
Semiannual Coupon = $55

Time to Maturity = 20 years
Semiannual Period to Maturity = 40

Let Semiannual YTM be i%

$844.87 = $55 * PVIFA(i%, 40) + $1,000 * PVIF(i%, 40)

Using financial calculator:
N = 40
PV = -844.87
PMT = 55
FV = 1000

I = 6.6115%

Semiannual YTM = 6.6115%
Annual YTM = 2 * 6.6115%
Annual YTM = 13.2230%

Before-tax Cost of Debt = 13.2230%
After-tax Cost of Debt = 13.2230% * (1 - 0.25)
After-tax Cost of Debt = 9.92%