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%

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%

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