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Question:
A manufacturing firm issues a semi‐annual coupon bond to finance a new project. The bond has a par value of $1,000, offers a coupon rate of 9%, and will mature in 15 years. Given that the bond’s current market value is $1,020.63, and the applicable tax rate is 35%, the company’s after‐ tax cost of debt is closest to:
A
5.69%.
explanation
N = 30; PV = –$1,020.63; FV = $1,000; PMT = $45; CPT I/Y; I/Y = 4.375
The yield to maturity on a BEY basis equals 4.375 x 2 = 8.75%. This is the before‐tax cost of debt (rd).
After‐tax cost of debt = rd (1 – t) = 8.75 (1 – 0.35) = 5.688%
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