Question

mojo mining has a bond outstanding that sells for $1,067 and matures in 23 years. the bond pays semiannual coupons and has a coupon rate of 6.26 percent. the par value is $1,000. if the company's tax rate is 21 percent, what is the aftertax cost of debt?

Answer 1

The after-tax cost of debt is calculated by taking the before-tax cost of debt and multiplying it by 1 minus the tax rate. Using the given information, the after-tax cost of debt for Mojo Mining's bond is 2.31%.

Step-by-step explanation:

The after-tax cost of debt is the cost of debt after taking into account the company's tax rate. To calculate the aftertax cost of debt, first calculate the before-tax cost of debt by dividing the annual coupon payment by the bond's price. In this case, the annual coupon payment can be calculated by multiplying the coupon rate by the par value of the bond, and the bond's price is given as $1,067. Then, multiply the before-tax cost of debt by 1 minus the tax rate to find the after-tax cost of debt. Finally, convert the result to a percentage to get the final after-tax cost of debt.

Let's calculate:

Annual coupon payment = (Coupon rate x Par value) / 2 = (0.0626 x $1,000) / 2 = $31.30

Before-tax cost of debt = Annual coupon payment / Bond price = $31.30 / $1,067 = 0.0293

After-tax cost of debt = Before-tax cost of debt x (1 - Tax rate) = 0.0293 x (1 - 0.21) = 0.0231

After-tax cost of debt (in percentage) = After-tax cost of debt x 100 = 0.0231 x 100 = 2.31%