Question

Micro Advantage issued a $5,250,000 par value, 15-year bond a year ago at 94 (i.e., 94% of par value) with a stated rate of 10%. Today, the bond is selling at 115 (i.e., 115% of par value). If the firm’s tax bracket is 30%, what is the current after-tax cost of this debt?

Answer 1

Answer:

7.45%

Explanation:

Total amount the firm received from bond issuance = $5,250,000 * 94%

= $4,935,000

The total coupon must be paid to bond holder annually

= Par value of $5,250,000 * coupon rate of 10%

= $5,250,000 * 10%

= $525,000

Rate of coupon paid over loan received = $525,000/ $4,935,000 = 10.64%

After-tax cost of this debt = 10.64%*(1-30%) = 7.45%