Question

PackMan Corporation has semiannual bonds outstanding with nine years to maturity and the bonds are currently priced at $754.08. If the bonds have a coupon rate of 7.25 percent, then what is the after-tax cost of d

Answer 1

The after-tax cost of debt is 8.22%

Step-by-step explanation:

The cost of debt is the actual cost of a business to raise debt finance. Yield to maturity is the cost of debt of a bond.

calculate the YTM as follow

Coupon = $1000 x 7.25% x 6/12 = $36.25

Number of periods = 9 yeas x 12/6 = 18 periods

Use the financial calculator as below

2nd I/Y 2, FV 1000, PMT 36.25, PV -754.08, N 18, CPT I/Y

Yield to maturity = 11.7499%

Now calculate the after tax YTM

YTM ( after tax ) = 11.7499% x ( 1 - 30% )

YTM ( after tax ) = 8.22%