Answer:
Yield on new issue = 11.99%
After tax cost of debt = 8.99%
Explanation:
Given the following :
Future value (FV) = 1000
Period (n) = 30 years
Payment per period (PMT) = $105
Present value (PV) = $880
Tax rate = 25% = 0.25
a. Compute the yield to maturity on the old issue and use this as the yield for the new issue.
Coupon rate = (PMT ÷ par value)
Coupon rate = 105÷ 1000
Coupon rate = 10.50%
Using the financial calculator, bond yield ;
(FV, rate, period, No of payment per year, PV)
Yield on new issue = 11.99%
RATE(n,PMT, PV, FV, 0)
B.) after tax cost of debt, that is, after making necessary tax adjustments
Tax rate = 0.25
After tax cost of debt = yield × (1 - tax rate)
After tax cost = 0.1199 × (1 - 0.25)
After tax cost of debt = 0.1199 × 0.75
After tax cost of debt = 0.089925
After tax cost of debt = 8.99%
