Answer:
After tax cost of debt is 6.45%
Explanation:
In computing the after tax cost of debt, the starting point would be to ascertain the pre-tax cost of debt-yield to maturity-before applying the tax.
The yield to maturity can be calculated using the rate formula in excel ,given as :=rate(
nper,pmt,-pv,fv)
nper is the nuer of coupon interest the bond would pay which is 20
pmt is the annual payment of the bond which is 13%*$1000=$130
pv is the current price of the bond $1,181.96
fv is the face value of the bond which is $1000
=rate(20,130,-1181.96,1000)
rate=10.75%
Pretax cost of debt is 10.75%
After tax cost of debt=pretax cost of debt*(1-tax rate)
tax rate is 40%=0.4
=10.75%*(1-0.4)
=6.45%
