Question

JBL has a 20-year, 8% annual coupon bonds outstanding. If the bonds currently sell for 95% of $1000 par value and the firm pays an average tax rate of 35%, what will be the before-tax and after-tax component cost of debt?

Answer 1

8.53% and 5.54%

Step-by-step explanation:

In this question, we use the Rate formula which is shown in the spreadsheet.

The NPER represents the time period.

Given that,

Present value = $1000 × 95% = $950

Assuming figure - Future value or Face value = $1,000

PMT = 1,000 × 8% = $80

NPER = 20 years

The formula is shown below:

= Rate(NPER;PMT;-PV;FV;type)

The present value come in negative

So, after solving this,

1. The pretax cost of debt is 8.53%

2. And, the after tax cost of debt would be

= Pretax cost of debt × ( 1 - tax rate)

= 8.53% × ( 1 - 0.35)

= 5.54%