Question

Galvatron Metals has a bond outstanding with a coupon rate of 6.3 percent and semiannual payments. The bond currently sells for $1,919 and matures in 17 years. The par value is $2,000 and the company's tax rate is 39 percent. What is the company's aftertax cost of debt?

Answer 1

4.09%

Step-by-step explanation:

For computing the after cost of debt we have to applied the RATE formula i.e to be shown in the attachment below:

Given that,

Present value = $1,919

Future value or Face value = $2,000

PMT = 2,000 × 6.3% ÷ 2 = $63

NPER = 17 years × 2 = 34 years

The formula is shown below:

= Rate(NPER,PMT,-PV,FV,type)

The present value come in negative

So, after applying the above formula,

1. The pretax cost of debt is 3.35% × 2 = 6.70%

2. And, the after tax cost of debt would be

= Pretax cost of debt × ( 1 - tax rate)

= 6.70% × ( 1 - 0.39)

= 4.09%