Question

The outstanding bonds of Tech Express have a face value of $1,000 and mature in 10 years. They are currently priced at $989. These bonds have a 6 percent coupon and pay interest annually. Ten-year Treasury bonds are currently yielding 3.4 percent. If the firm’s tax rate is 28 percent, what is the firm's after-tax cost of debt? (round answer to whole number with two decimal points: i.e., use 1.23 percent instead of 0.0123)

Answer 1

the firm's after-tax cost of debt is 4.43 %.

Step-by-step explanation:

Cost of Debt is the return required by providers of debt capital to the company.

First Determine the yield of the Tech Express bonds, r

Pv = - $989

pmt = $1,000 × 6.00 % = $60

p/yr = 1

n = 10

Fv = $1,000

r = ?

Using a Financial Calculator, the yield of the Tech Express bonds, r is 6.1505 %.

Therefore,

Cost of Debt = Interest × ( 1 - tax rate)

= 6.1505 % × ( 1 - 0.28)

= 4.43 %