Question

Suppose a firm has a bond issue currently outstanding that has 25 years left to maturity. The coupon rate is 9%, and coupons are paid semiannually. The bond is currently selling for $908.72. What is the after-tax cost of debt if the relevant tax rate is 40 percent?

Answer 1

K = Nx2

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

k=1

K =25x2

908.72 =∑ [(9*1000/200)/(1 + YTM/200)^k]     +   1000/(1 + YTM/200)^25x2

k=1

YTM = 10%

after-tax cost of debt = YTM*(1-tax rate) = 10*(1-0.4) = 6%