Question

Following is the most recent FINRA bond quote for a Kimberly Clark Inc. corporate bond. (Assume semi-annual coupons)

Company (ticker)                    Coupon           Maturity                      Last Price

Kimberly Clark (KMB)          7.500               Apr 30, 2040               112.350

What is the after-tax cost of debt for Kimberly Clark, Inc. assuming that floatation costs are 3% and that Kimberly Clark pays taxes at a 28% rate? (Assume today is April 30, 2020)

4.81%

4.96%

5.40%

6.68%

9.68%

Answer 1

Face Value = $1,000
Current Price = $112.350 *$1,000 = $1,123.50

Market Price = $1,123.50 - $1,123.50 * 3%
Market Price = $1,123.50 - $33.71 = $1,089.79

Annual Coupon Rate = 7.5%
Semiannual Coupon Rate = 3.75%
Semiannual Coupon = 3.75%*$1,000 = $37.5

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

Let semiannual YTM be i%

$1,089.79 = $37.50 * PVIFA(i%, 42) + $1,000 * PVIF(i%, 40)

Using financial calculator:
N = 40
PV = -1,089.79
PMT = 37.5
FV = 1000

I = 3.34%

Semiannual YTM = 3.34%
Annual YTM = 2 * 3.34%
Annual YTM = 6.68%

Before-tax Cost of Debt = 6.68%
After-tax Cost of Debt = 6.68% * (1 - 0.28)
After-tax Cost of Debt = 4.81%