The outstanding bonds of The Purple Fiddle are priced at $898 and mature in nine years. These bonds have a 6 percent coupon and

Question

katen-ka-za [31]

4 years ago

14

The outstanding bonds of The Purple Fiddle are priced at $898 and mature in nine years. These bonds have a 6 percent coupon and

pay interest annually. The firm's tax rate is 35 percent. What is the firm's after tax cost of debt?

Business

1 answer:

jolli1 [7] · Answer 1 · 2021-12-19T04:53:43+03:00

Answer : 4.34 %

Explanation: The effective interest rate a company pays on its debt obligation is called cost of debt. The cost of debt is denoted by [k]x_{d}[/tex] . As there is a tax shield available on debt interest it is generally calculated by subtracting the marginal tax rate from before tax cost of debt .

.

$k_{d}=\frac{c}{p}\times\left ( 1-t \right )$

where,

c= coupon payment = 1000 * 6% = 60

p = current market price = $898

t= marginal tax rate

therefore :-

= $\frac{60}{898}\times \left ( 1-0.35 \right )$

= 4.34 %

The outstanding bonds of The Purple Fiddle are priced at​ $898 and mature in nine years. These bonds have a 6 percent coupon and

The outstanding bonds of The Purple Fiddle are priced at $898 and mature in nine years. These bonds have a 6 percent coupon and