Question

5 years ago, Barton Industries issued 25-year noncallable, semiannual bonds with a $1,000 face value and an 8% coupon, semiannual payment ($40 payment every 6 months). The bonds currently sell for $894.87. If the firm's marginal tax rate is 25%, what is the firm's after-tax cost of debt

Answer 1

9%

Step-by-step explanation:

The cost of debt is the yield to maturity of the bond. Yield to maturity is the annual rate of return that an investor receives if a bond bond is held until the maturity. it is long term return which is expressed in annual rate.

Number of payment = n = 40 payments

Coupon Payment = $1,000 x 8% /2 = $40

Yield to maturity = [ C + ( F - P ) / n ] / [ (F + P ) / 2 ]

Yield to maturity = [ $40 + ( $1,000 - $894.87) / 40 ] / [ ($1,000 + $894.87) / 2 ] = 0.045

Yield to maturity = 4.5% semiannually = 9% annually

Answer 2

Firms after tax of debt is 6.87%

Step-by-step explanation:

Firm's after-tax cost of debt is calculated using the RATE function as follow:-

=RATE(nper,pmt,pv,fv)*(1-tax rate)

=(RATE(20*2,40,-894.87,1000)*2)*(1-25%)

=6.87%