Question

(Cost of​ debt)  Belton Distribution Company is issuing a ​$1 comma 000 par value bond that pays 7.9 percent annual interest and matures in 15 years that is paid semiannually. Investors are willing to pay ​$960 for the bond. The company is in the 18 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 nothing​%. ​(Round to two decimal​ places.)

Answer 1

Calculating pre-tax cost of bond:

Face value = Future value (FV) = $1000

No. of semi-annual coupons (N) = 30

Present value of bond (PV) = (-$960) {Outflow}

Semi-annual coupon on bond (PMT) = 1000 x 7.9% x 1/2 = $ 39.50

Yield to maturity (YTM) = ??

Therefore, using financial calculator or Rate function in excel,

Yield to maturity (YTM) = 4.187% per half year = 8.373% p.a.

Pre-tax cost of debt = 8.373%

Therefore, after-tax cost of debt = pre-tax cost of debt x (1-tax) = 8.373% x (1-15%) = 7.117% p.a.

Thumbs up please if satisfied. Thanks :)