Answer:
Pre-tax cost of debt is 8.7%
After-tax cost of debt is 5.66%
Explanation:
the cost of debt financing before tax is the yield to maturity on the bond, which can be computed using the rate formula in excel.
=rate(nper,pmt,-pv,fv)
nper is the number of times the bonds pay s interest which is 15*2=30
pmt is the semi-annual interest of the bond:9.6%/2*$1000=$48
pv is the current market price of $1,120 minus 4% flotation cost i.e 1120*96%=$1075.2
Fv is the face of the bond at $1000
=rate(30,48,-1075.2
,1000)
rate=4.35% on semi-annual basis
rate =4.35%*2=8.7% on annual basis
after tax cost of debt =8.7%*(1-0.35)
=5.66%
