PackMan Corporation has semiannual bonds outstanding with nine years to maturity and are currently priced at $754.08. If the bon
ds have a coupon rate of 7.25 percent, then what is the after-tax cost of debt for PackMan if its marginal tax rate is 30 percent? Complete the calculation as is done on Wall Street.
a. 7.050%
b. 8.225%
c. 12.095%
d. 11.750%
a. 7.050%
b. 8.225%
c. 12.095%
d. 11.750%
1 answer:
Answer:
b. 8.225%
Explanation:
In this question, we use the Rate formula which is shown in the spreadsheet.
The NPER represents the time period.
Given that,
Present value = $754.08
Assuming figure - Future value or Face value = $1,000
PMT = 1,000 × 7.25% ÷ 2 = $36.25
NPER = 9 years × 2 = 18 years
The formula is shown below:
= Rate(NPER,PMT,-PV,FV,type)
The present value come in negative
So, after solving this,
1. The pretax cost of debt is 11.75%
2. And, the after tax cost of debt would be
= Pretax cost of debt × ( 1 - tax rate)
= 11.75% × ( 1 - 0.30)
= 8.225%
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