Question

The George Company, Inc., has two issues of debt. Issue A has a maturity of 15 years, and it was issued as a 15-year bond 5 years ago. Its coupon rate is 9%, and the face value is 6 million dollars. Issue B is 6 million dollars. The George company has a marginal tax rate of [missing information]. What is the after-tax cost of debt for Issue A?

A. 8.47%
B. 5.56%
C. 4.73%
D. 0%

Answer 1

Without the marginal tax rate, the after-tax cost of debt for Issue A of The George Company cannot be calculated. For a similar bond, the interest rate paid is the annual coupon divided by the face value. If market interest rates rise, the bond's value will decrease.

Step-by-step explanation:

To calculate the after-tax cost of debt for Issue A of The George Company, Inc., we need the marginal tax rate, which is missing in the question. Generally, the after-tax cost of debt can be calculated using the formula: After-Tax Cost of Debt = (Coupon Rate) * (1 - Marginal Tax Rate). However, without the marginal tax rate, we cannot provide a specific answer.

Using a similar example, if we think about Ford Motor Company issuing a five year bond with a face value of $5,000 that pays an annual coupon payment of $150, the interest rate equals the annual coupon payment divided by the face value, which would be 3% ($150/$5,000).

When the market interest rate changes, the bond's value inversely responds to the interest rate movement. If the market interest rate rises from 3% to 4%, the value of the bond would decrease because new bonds can now be issued at a higher interest rate, making the existing bonds with lower rates less attractive.