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mr Goodwill [35]
2 years ago
11

A corporate bond has a face value of $1,000 and a coupon rate of 5%. The bond matures in 20 years and has a current market price

of $900. If the corporation sells more bonds, it will incur flotation costs of $25 per bond. If the corporate tax rate is 35%, what is the after-tax cost of debt capital
Business
1 answer:
user100 [1]2 years ago
8 0

Answer: 4.10%

Explanation:

Solve for the current rate being used using the RATE function on Excel.

Number of periods = 15

Payment = 1,000 * 5% = 50

Present value = Current market price - floatation costs = 900 - 25 = 875

Future value = 1,000 face value

The result will be:

= 6.31%

If tax is 35%, after-tax cost is:

= 6.31% * (1 - 35%)

= 4.10%

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