Question

Galvatron Metals has a bond outstanding with a coupon rate of 6.3 percent and semiannual payments. The bond currently sells for $949 and matures in 25 years. The par value is $1,000 and the company's tax rate is 39 percent. What is the company's aftertax cost of debt

Answer 1

To calculate the company's aftertax cost of debt, we need to calculate the semiannual interest payment and the yield to maturity. Then, we adjust the YTM for taxes to find the aftertax cost of debt, which is approximately 2.19%.

Step-by-step explanation:

To calculate the company's aftertax cost of debt, we need to first calculate the semiannual interest payment. The coupon rate is given as 6.3 percent, so the semiannual interest payment would be (6.3% / 2) * $1,000 = $31.50. Since the bond sells for $949, we can calculate the yield to maturity (YTM) as the rate that would make the present value of the bond's cash flows equal to its market price. Using a financial calculator or spreadsheet, we can find that the YTM is approximately 3.6%.

Next, to calculate the aftertax cost of debt, we need to adjust the YTM for taxes. The tax rate is given as 39 percent. The aftertax cost of debt can be calculated as the YTM multiplied by (1 - tax rate). Therefore, the company's aftertax cost of debt is approximately 3.6% * (1 - 0.39) = 2.19%.

Answer 2

The right response is "4.102%".

Step-by-step explanation:

Given:

Number of half years,

n =
`25* 2`

=
`50`

Coupon per half years,

c =
`1000* (6.3 \ percent)/(2)`

=
`31.5`

Price,

pv = 949

Par value,

= 1000

Now,

The YTM will be:

=
`rate(n,c,-pv,fv)* 2`

=
`rate(50,31.5,-949,1000)* 2`

=
`6.724` (%)

hence,

After tax cost of debt will be:

=
`YTM* (1-tax \ rate)`

=
`6.724* (1-39)`

=
`4.102` (%)