Question

​(Cost of​ debt) Belton Distribution Company is issuing a ​$1 comma 000 par value bond that pays 8.9 percent annual interest and matures in 15 years that is paid semiannually. Investors are willing to pay ​$962 for the bond. The company is in the 18 percent marginal tax bracket. What is the​ firm's after-tax cost of debt on the​ bond?

Answer 1

Answer:

After tax cost of debt is 7.69%

Explanation:

The after tax cost of debt can be computed by first of all determining the pre-tax cost of debt .

The pre-tax of debt is the yield to maturity computed using the rate formula in excel as follows:

=rate(nper,pmt.-pv,fv)

nper is the number of times the bond would pay coupon interest over the entire bond life ,which is 15 years multiplied by 2=30

pmt is the semi-annual interest which is $1000*8.9%/2=$44.5

pv is the current price of the bond at $962

fv is the face value of the bond at $1000

=rate(30,44.5,-962,1000)=4.69%

this is the semi-annul yield ,annual yield is 9.38%

The 9.38% is the pretax

after tax cost of debt=9.38%*(1-0.18)=7.69%

0.18 is the 18% tax rate