Question

Mojo Mining has a bond outstanding that sells for $1,040 and matures in 18 years. The bond pays semiannual coupons and has a coupon rate of 5.54 percent. The par value is $1,000. If the company's tax rate is 35 percent, what is the aftertax cost of debt

Answer 1

Mojo Mining

The aftertax cost of debt is:

= 3.6%.

Step-by-step explanation:

a) Data and Calculations:

Bonds outstanding value = $1,040

Maturity period = 18 years

Payment of interest = semiannual

Coupon rate = 5.54% per annum

Coupon rate per half-year = 2.77% (5.54%/2)

Company's tax rate = 35%

Aftertax cost of debt = 5.54% (1 - 0.35)

= 5.54% * 0.65

= 0.036

= 3.6%

b) Mojo Mining's aftertax cost of debt is a product of its cost of debt of 5.54% and the difference between tax savings, which results from the deduction of interests on the debt.