Question

issues new bonds to fund an acquisition. The face value of the bond is $100 and annual coupon is 6.5%. Further, this bond matures in 20 years and is issued at a price of $105. Assuming KJ Pharma's tax rate is 30%, what is its After-Tax Cost of Debt

Answer 1

Answer:

KJ Pharma Corporation

KJ Pharma's after-tax cost of debt is:

= 4.55%.

Explanation:

a) Data and Calculations:

Face value of the bond = $100

Annual coupon rate (cost of debt) = 6.5%

Maturity period of bond = 20 years

Tax rate = 30%

After-Tax Cost of Debt = 6.5 (1 - 0.3)

= 4.55%

b) KJ Pharma's after-tax cost of debt is the interest paid on the bond less any income tax savings accounted for as deductible interest expenses. To calculate the after-tax cost of debt, KJ subtracts the company's effective tax rate from 1 and multiplies the difference by its cost of debt.