Question

Tiny Tots has debt​ outstanding, currently selling for ​$820 per bond. It matures in 16 ​years, pays interest​ annually, and has a 11​% coupon rate. Par is ​$1000​, and the​ firm's tax rate is 25​%. What is the​ after-tax cost of​ debt?
The​ after-tax cost of debt for Tiny Tots is
nothing​%. ​(Round to two decimal​ places.)

Answer 1

Given about Tiny Tots debt,

Current price = $820

years to maturity = 16 years

coupon rate = 11% paid annually,

face value = $1000

So, annual coupon payment = 11% of 1000 = $110

So, annual yield on this bond can be calculated on financial calculator using following values:

FV = 1000

PV = -820

N = 16

PMT = 110

compute for I/Y, we get I/Y = 13.85%

For a company, its pretax cost of debt equals its bond's Yield

So, pretax cost of debt Kd = 13.85%

after-tax cost of debt for Tiny Tots is Kd*(1 - tax rate) = 13.85*(1-0.25) = 10.39%