Question

PackMan Corporation has semiannual bonds outstanding with nine years to maturity and 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 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%

Answer 1

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%