Question

Rover's Dog Care has outstanding debt currently selling for $900 per bond. It matures in 7 years, pays interests semiannually, and has a coupon rate of 9%. If par is $1,000 and tax rate is 20%, what is the after-tax cost of debt? The after-tax cost for Rover's Dog Care is _%?

Answer 1

K = Nx2

Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2

k=1

K =7x2

900 =∑ [(9*1000/200)/(1 + YTM/200)^k]     +   1000/(1 + YTM/200)^7x2

k=1

YTM% = 11.09

After tax rate = YTM * (1-Tax rate)

After tax rate = 11.09 * (1-0.2)

After tax rate = 8.87