Question

Tangshan Mining is considering issuing long-term debt. The debt would have a 30 year maturity and a 6 percent coupon rate and make semiannual coupon payments. In order to sell the issue, the bonds must be underpriced at a discount of 1 percent of face value. In addition, the firm would have to pay flotation costs of 1 percent of face value. The firm's tax rate is 21 percent. Given this information, the after-tax cost of debt for Tangshan Mining would be ________.

Answer 1

Answer:

After tax cost of debt is 4.85%

Explanation:

The starting to computing the after tax cost of debt is to calculate the yield to maturity on the bond .

The yield to maturity on the bond can be computed using the rate formula in excel.

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

nper is the time to maturity of 30 years multiplied by 2 since the bond is paying interest on semi-annual basis

pmt is the semi-annual interest receivable by investor which 6.0%/2*$1000=$30

pv is the current market price :$1000*98% =$980 (100-2%),1% deducted for discount,1% for issue cost

fv is the face value of $1000

=rate(60,30,-980,1000)

rate=3.07%

The 3.07%  is the semi-annual YTM, whereas the annual YTM 3.07% *2=6.14%

After tax cost of debt=YTM*(1-0.21)

                                    =6.14%*(1-0.21)

                                   =4.85%