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 $1,107.41. What is the after-tax cost of debt if the relevant tax rate is 40 percent?

		2.0%
		3.2%
		4.8%
		8.0%
		12.5%

Answer 1

Answer : Correct Option is 4.8%

Calculation of after tax cost of debt :

Using Financial Calculator

=RATE(nper,pmt,pv,fv)

where nper is Number of years to maturity i.e 25 * 2 = 50 (Multiplied by 2 As coupons are paid semiannually)

pmt is Interest payment i.e 1000 * 9% = 90 / 2 = 45 (Divided by 2 As coupons are paid semiannually)

pv is Current Market Price

= 1,107.41

Note : pv should be taken as negative.

fv is face value i.e 1000

=RATE(50,45,-1107.41,1000)

therefore ,Before Tax cost of Debt is 4%(Semiannual)

Before Tax cost of Debt is 8%(Annual)

After Tax cost of Debt = 8% * (1 - 0.40) = 4.8%