Question

5 years ago, Barton Industries issued 25-year noncallable, semiannual bonds with a $1,100 face value and a 8% coupon, semiannual payment ($44 payment every 6 months). The bonds currently sell for $845.87. If the firm's marginal tax rate is 40%, what is the firm's after-tax cost of debt? Round your answer to 2 decimal places. Do not round intermediate calculations.

Answer 1

Face Value = $1,100
Current Price = $845.87
Semiannual Coupon = $44

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

Let Semiannual YTM be i%

$845.87 = $44 * PVIFA(i%, 40) + $1,100 * PVIF(i%, 40)

Using financial calculator:
N = 40
PV = -845.87
PMT = 44
FV = 1100

I = 5.426%

Semiannual YTM = 5.426%
Annual YTM = 2 * 5.426%
Annual YTM = 10.852%

Before-tax Cost of Debt = 10.852%
After-tax Cost of Debt = 10.852% * (1 - 0.40)
After-tax Cost of Debt = 6.51%