A company is considering two investment projects. If they use the total project approach and the differential approach, both app
2 answers:
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Answer:
Ans. The after tax cost of this debt is 4.8526% annual.
Explanation:
Hi, first we have to establish the amount to pay for each coupon. In our case, the coupon is paid semi-annually, so the coupon is:
we also need to take into account that this is an eight years bond, we need to change years into semesters, so 8 years = 16 semesters.
We´re going to need MS Excel to find this value (Function "IRR"), Please see the attached excel sheet for further clarifications.
This is what it should look like
Price 97,8
Coupon 5,70% annual
Coupon 0,0285 semi-annual
taxes 21%
time 8 years
time 16 semesters
Period Cash Flow
0 97,8
1 -2,85
2 -2,85
3 -2,85
4 -2,85
5 -2,85
6 -2,85
7 -2,85
8 -2,85
9 -2,85
10 -2,85
11 -2,85
12 -2,85
13 -2,85
14 -2,85
15 -2,85
16 -102,85
Using the "IRR" function, we get 3.0255%, but this discount rate is semi-annual, and the answer we are looking for has to be effective annual, therefore, we need to use the followiong formula.
So our discount rate (cost of this debt) before taxes is 6.1425% annual. In order to find the after tax cost of this debt, we have to use the following formula.
Therefore, the after tax cost of this debt is 4.8526% annual.
Best of luck.