Question

Quantitative Problem: 5 years ago, Barton Industries issued 25-year noncallable, semiannual bonds with a $1,000 face value and an 8% coupon, semiannual payment ($40 payment every 6 months). The bonds currently sell for $847.87. If the firm's marginal tax rate is 25%, what is the firm's after-tax cost of debt

Answer 1

After-tax cost of debt = 73.06%

Step-by-step explanation:

Nper = 20*2 = 40

Pmt = 40

Pv = -847.87

Fv = 1000

Tax rate = 25%

Firm's after-tax cost of debt is calculated as follow:

After-tax cost of debt = RATE(Nper, Pmt, Pv, Fv) * (1-tax rate)

After-tax cost of debt = (RATE(20*2,40,-894.87,1000)*2)*(1-25%)

After-tax cost of debt = (0.048709771*2) * 0.75

After-tax cost of debt = 0.097419542 * 0.75

After-tax cost of debt = 0.0730646565

After-tax cost of debt = 73.06%