Answer:
5.34%
The correct option is C,5.60%
Explanation:
The are two requirements here,the first is after cost of debt for the first part of the case study and after tax cost of debt for the second part of the scenario:
1.after tax cost of debt=pretax cost of debt*(1-t)
pretax cost of debt is 9.7%
t is the tax rate at 45% or 0.45
after tax cost of debt=9.7%*(1-0.45)=5.34%
2.
The pretax cost of debt here is computed using the rate formula in excel:
=rate(nper,pmt,-pv,fv)
nper is the number of times the bond pays coupon interest which is 15
pmt is the annual coupon interest receivable by investors i.e $1000*12%=$120
pv is the current market price of the bond which is $1,136.50
fv is the face value of the bond at $1000
=rate(15,120,-1136.50,1000)
rate =10.19%
after tax cost of debt=10.19%
*(1-0.45)=5.60%
