Question

Ningbo Shipping, which has an average tax rate of 40 percent, would like to estimate the after-tax cost of debt for a 15-year, 12 percent, $1,000 par value bond, selling at $950. Based on this information, the after-tax cost of debt is:

Answer 1

After tax cost of debt is 7.65%

Step-by-step explanation:

First we need to calculate the pre tax cost of debt or bond. That is also known as the bonds ytm or interest rate. To calculate that we need to know the bonds par/future value, its price/present value, its number of years to maturity and its coupon payments.

FV= 1,000

PV=-950

PMT= 0.12*1000=120

N= 15

Put all these values in a financial calculator compute I

I=12.76

The YTM of pre tax cost of debt is 12.76%

To calculate the after tax cost of debt we will multiply the pre tax cost of debt with (1-tax rate)

After tax cost of debt = 0.1276*(1-0.4)=0.07656=7.65%