Question

Easy Rider Inc. sold a 15 year $1,000 face value bond with a 10 percent coupon rate. Interest is paid annually. After flotation costs, Easy Rider received $928 per bond. Compute the after-tax cost of debt for these bonds if the firm's tax rate is 21 percent.

Answer 1

Information provided:

Face value= future value= $1,000

Coupon rate= 10%

Coupon payment= 0.10*1,000= 100

Time= 15 years

Present value= $928

Tax= 21%

Enter the below in a financial calculator to calculate the yield to maturity:

FV= 1,000

PV= -928

PMT= 100

N= 15

Press the CPT key and I/Y to compute the yield to maturity.

The value obtained is 11%.

After cost of debt= Before tax cost of debt*(1- tax)

                           = 11%*(1- 0.21)

                            = 8.69%.

Therefore, the after tax cost of debt is 8.69%.

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