Question

Quantitative Problem: 5 years ago, Barton Industries issued 25-year noncallable, semiannual bonds with a $1,000 face value and a 9% coupon, semiannual payment ($45 payment every 6 months). The bonds currently sell for $896.87. If the firm's marginal tax rate is 25%, what is the firm's after-tax cost of debt

Answer 1

7.67%

Step-by-step explanation:

The Excel rate function can be used to determine the before-tax cost of debt as follows:

=rate(nper,pmt,-pv,fv)

nper=number of semiannual coupons in the remaining 20 years=20*2=40

pmt=semiannual coupon=$45

pv=current amrket price= $896.87

fv=face value=$1000

=rate(40,45,-896.87,1000)=5.11%

5.11% is the semiannual yield

yield to maturity=5.11%*2=10.22%

after-tax cost of debt=pretax cost debt*(1-tax rate)

tax rate=25%

after-tax cost of debt=10.22%*(1-25%)=7.67%