Question

Quantitative Problem: 5 years ago, Barton Industries issued 25-year noncallable, semiannual bonds with a $2,000 face value and a 6% coupon, semiannual payment ($60 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

K = Nx2

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

k=1

K =25x2

845.87 =∑ [(6*2000/200)/(1 + YTM/200)^k]     +   2000/(1 + YTM/200)^25x2

k=1

YTM = 14.774%

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

After tax rate = 14.774 * (1-0.4)

After tax rate = 8.86