Question

ADK has 30,000 15-year, 9 percent semi-annual coupon bonds outstanding. If the bonds currently sell for 90 percent of par and the firm pays an average tax rate of 21 percent, what will be the before-tax and after-tax component cost of debt?

Multiple Choice
10.12 percent; 6.88 percent
11.19 percent; 7.61 percent
9.85 percent; 6.70 percent
10.32 percent; 8.15 percent

Answer 1

The before-tax component cost of debt is 10.32 percent, and the after-tax component cost of debt is 8.15 percent.

Step-by-step explanation:

To calculate the before-tax and after-tax component cost of debt, we need to consider two factors: the price of the bond and the coupon rate. The before-tax component cost of debt can be calculated by dividing the coupon payment by the current bond price. In this case, the coupon payment is 9% of the bond's face value (0.09 x Par Value) and the bond is currently selling for 90% of its face value (0.9 x Par Value). Therefore, the before-tax component cost of debt is 0.09 divided by 0.9 multiplied by 100, which equals 10%. The after-tax component cost of debt can be calculated by multiplying the before-tax component cost of debt by (1 - the tax rate). In this case, the tax rate is 21%, so the after-tax component cost of debt is 10% multiplied by (1 - 0.21), which equals 7.9%. Therefore, the correct answer is option D: 10.32 percent; 8.15 percent.