Question

The long-term debt is formed by corporate bonds (face value of $1,000) issued by the company,...

The long-term debt is formed by corporate bonds (face value of $1,000) issued by the company, with a 15 year maturity and a 9.35% cuopon interest. The bond is sold with a $25 premium andto be sold, a 4.3% costs is charged. The marginal tax applied to the company is 34%

calculate the company after tax cost of debt
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Answer #1

Answer:
Face Value = $1,000

Current Price = $1,025 – ($1,025 * 4.3%)
Current Price = $980.925

Annual Coupon Rate = 9.35%
Annual Coupon = 9.35% * $1,000
Annual Coupon = $93.50

Time to Maturity = 15 years

Let Annual YTM be i%

$980.925 = $93.50 * PVIFA(i%, 15) + $1,000 * PVIF(i%, 15)

Using financial calculator:
N = 15
PV = -980.925
PMT = 93.50
FV = 1000

I = 9.595%

Annual YTM = 9.595%

Before-tax Cost of Debt = 9.595%
After-tax Cost of Debt = 9.595% * (1 - 0.34)
After-tax Cost of Debt = 6.33%

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