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miskamm [114]
3 years ago
12

Mojo Mining has a bond outstanding that sells for $1,061 and matures in 25 years. The bond pays semiannual coupons and has a cou

pon rate of 6.1 percent. The par value is $1,000. If the company's tax rate is 39 percent, what is the aftertax cost of debt

Business
1 answer:
Reptile [31]3 years ago
8 0

Answer:

3.44%

Explanation:

For computing the after tax cost of debt we need to apply the RATE formula i.e shown in the attachment below:

Provided that,  

Present value = $1,061

Future value or Face value = $1,000  

PMT = 1,000 × 6.1% ÷ 2 = $30.5

NPER = 25 years × 2 = 50 years

The formula is shown below:  

= Rate(NPER;PMT;-PV;FV;type)  

The present value come in negative  

So, after applying the above formula,

1. The pretax cost of debt is 2.82% × 2 = 5.64%

2. And, the after tax cost of debt would be

= Pretax cost of debt × ( 1 - tax rate)

= 5.64% × ( 1 - 0.39)

= 3.44%

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