A company has outstanding 20-year noncallable bonds with a face value of $1000, and 11% annual coupon, and a market price of $1,
294.54. if the company was to issue new debt, what would be a reasonable estimate of the interest rate on the debt? If the company’s tax rate is 40%, what Is its after-ax cost of debt?
1 answer:
Answer:
8% and 4.8%
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 = $1,294.54
Future value or Face value = $1,000
PMT = 1,000 × 11% = $110
NPER = 20 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 8%
2. And, the after tax cost of debt would be
= Pretax cost of debt × ( 1 - tax rate)
= 8% × ( 1 - 0.40)
= 4.8%
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