Question

The Corner Bakery has a bond issue outstanding that matures in 7 years. The bonds pay interest semi-annually. Currently, the bond prices are quoted at $1014 per $1000 of face value and carry a 9% coupon. What is the firm's after-tax cost of debt if the tax rate is 30%?

Answer 1

0.0611 or 6.11%

Step-by-step explanation:

The computation of the after tax cost of debt is shown below:

But before that we have to determine the yield to maturity

Given that

NPER = 7 × 2 = 14

PV = $1,014

FV = $1,000

PMT = $1,000 × 9% ÷ 2 = $45

The formula is shown below:

= RATE(NPER;PMT;-PV;FV;TYPE)

After applying it, the yield to maturity is

= 4.3643% × 2

= 8.72851%

Now After Tax Cost of Debt is

= 0.0872851 × ( 1 - 0.30)

= 0.0611 or 6.11%