Question

Belton Distribution Company is issuing a $1000 par value bond that pays 7.6% annual interest and matures in 15 years that is paid semiannually. Investors are willing to pay $958 for the bond. The company is in the 19 percent marginal tax bracket. What is the​ firm's after-tax cost of debt on the​ bond?

The​ firm's after-tax cost of debt on the bond is _________%​(Round to two decimal​ places.)

Answer 1

Face Value = $1,000

Current Price = $958

Annual Coupon rate = 7.6%

Semi annual coupon rate = 3.8%

Semi Annual Coupon = 1,000 * 3.8% = $38

Maturity Period = 15 years

Let Semi annual YTM be "i%"

958 = 38 * PVIFA (i%,30) + 1,000 * PVIF(i%,30)

i% = 0.04044 or 4.044%

Annual YTM =  4.044* 2 = 8.088%

After Tax Cost of Debt = Annual Yield to Maturity * (1 - Tax Rate)

After Tax Cost of Debt = 8.088 * (1 - 0.19)

After Tax Cost of Debt = 6.55%

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