Question

Stancorp has a $ 14.4 million debt issue​ outstanding, with a 5.8 % coupon rate. The debt has​ semi-annual coupons, with the next coupon is due in six months. The debt matures in five years. It is currently priced at 95 % of par value. a. What is​ Stancorp's pre-tax cost of​ debt? Note: Compute the effective annual return. b. If Stancorp faces a 30 % tax​ rate, what is its​ after-tax cost of​ debt?

Answer 1

a

Cost of debt

K = Nx2

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

k=1

K =5x2

950 =∑ [(5.8*1000/200)/(1 + YTM/200)^k]     +   1000/(1 + YTM/200)^5x2

k=1

YTM = 7.00 = pretax cost of debt

b

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

After tax cost of debt = 7.002489107*(1-0.3)

= 4.90