Question

What is the before-tax cost of debt for a corporation that issued 15-year bonds with a 10 percent annual coupon, paid semi-annually, par value of $1,000, bond sale price of $970, and $20 issue cost per bond, if the corporation has a marginal tax rate of 23%

Answer 1

10.68%

Step-by-step explanation:

Face value = 1,000

Coupon rate = 10%

Years to maturity = 15

Nper = 15*2 = 30

PMT = 1000*10%/2 = 50

Price(Present value) = Bond sale price - Issue cost

Price(Present value) = 970 - 20

Price(Present value) = 950

Yield to maturity = Rate(Nper, pmt, -pv, fv) * 2

Yield to maturity = Rate(30, 50, -950, 1000) * 2

Yield to maturity = 0.0534 * 2

Yield to maturity = 0.1068

Yield to maturity = 10.68%

Thus, the before-tax cost of debt is 10.68%