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Brums [2.3K]
3 years ago
8

5 years ago, Barton Industries issued 25-year noncallable, semiannual bonds with a $1,000 face value and a 12% coupon, semiannua

l payment ($60 payment every 6 months). The bonds currently sell for $845.87. If the firm's marginal tax rate is 25%, what is the firm's after-tax cost of debt
Business
1 answer:
Leona [35]3 years ago
6 0

Answer:

10.77%

Explanation:

FV: $1000

PV: $845.87

PMT: $60

Nper: 40 = (25 years - 5 years ago)* 2 for semi-annual payment

We use excel to calculate semi-annual discount rate by formula Rate(Nper,PMT,-PV,FV)

= rate(40,$60,-$845.87,$1000) = 7.18%

⇒ annual rate = semi-annual rate * 2 = 7.18% * 2 = 14.36%

after-tax cost of debt = 14.36% * (1 - 25%) = 10.77%

<em>Please see excel attached for the calculation</em>

Download xlsx
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