Question

FIN issues a $1000 par value bond that pays 7 precent annula interest and will mature in 14 years. The current market price for the bond is $950. Flotation costs will be 14 percent of market price. The company's marginal tax rate is 25%. What will be FIN's aafter tax cost of debt? g

Answer 1

7.05 %

Step-by-step explanation:

After tax cost of debt = interest x ( 1 - tax rate)

so, the initial step is to determine the interest rate :

The Bond Yield (i/yr) presents the market rate and this is what we want for our interest rate.

thus,

PV = - [$950 - ($950 x14%)] = - $817(remove floatation cost from market price)

FV = $1000

PMT = $1000 x 7 % = $70.00

P/YR = 1

N = 14

i/yr = ??

Using a financial calculator to input the values as above, the Bond Yield (i/yr) will be 9.40 %

therefore,

After tax cost of debt = 9.40 % x (1 - 0.25)

= 7.05 %