Question

Mojo Mining has a bond outstanding that sells for $640 and matures in 18 years. The bond pays semiannual coupons and has a coupon rate of 5.54%. The par value is $1,000. If the company's tax rate is 35%, what is the aftertax cost of debt

Answer 1

After tax cost of debt = 6.40%

Step-by-step explanation:

Coupon rate = 5.54%

Years of maturity = 18

NPER = Years of maturity * 2 = 18 * 2 = 36

PMT = (Face value * Coupon rate) / 2 = (1,000 * 5.54%) / 2 = 27.7

Face value = $1,000

Price (PV) = $640

Rate (36, 27.2, -640, 1000) Using excel = 0.049246 = 4.92%

YTM = Rate * 2 = 4.92% * 2 = 0.098492 = 9.85%

Pre-tax csot of debt = 9.85%

After tax cost of debt = 9.85%* (1 - 0.35)

After tax cost of debt = 9.85% * 0.65

After tax cost of debt = 0.098492 * 0.65

After tax cost of debt = 0.0640198

After tax cost of debt = 6.40%