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forsale [732]
3 years ago
14

Boulder Furniture has bonds outstanding that mature in 15 years, have a 6 percent coupon, and pay interest annually. These bonds

have a face value of $1,000 and a current market price of $1,075. What is the company's aftertax cost of debt if its tax rate is 32 percent?
Business
1 answer:
miskamm [114]3 years ago
7 0

Answer:

The company's after-tax cost of debt is  

Explanation:

Please find the below for detailed calculation and explanations:

The company's after-tax cost of debt is equal to: Bond's yield to maturity (YTM) x ( 1- tax rate). As tax rate is given, we need to calculate the YTM.

Bond's YTM is the discount rate which brings net present value of all cash flows from the bond, which are 15 annual interest payments of $60 each ( $1,000 x 6%) and face value repayment of $1,000 at maturity, equal to its current market price of $1,075. So, it is calculated as below:

( 60/ YTM) x [ 1 - (1+YTM)^-15 ] + 1,000/ (1+YTM)^15 = 1,075 <=> YTM = 5.26%.

=> The company's after-tax cost of debt is equal to: Bond's YTM x ( 1- tax rate) = 5.26% x ( 1 - 32%) = 3.58%.

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Answer:

I, II and III.

Explanation:

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3 years ago
For fixed-rate bonds it's important to realize that the value of the bond has a(n)-Select relationship to the level of interest
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Answer:

Answer is explained in the explanation section below.

Explanation:

It's necessary to remember that the value of fixed-rate bonds is inversely proportional to the level of interest rates. The value of the bond decreases as interest rates rise; moreover, the value of the bond rises as interest rates fall. A Bond with a lower coupon sells for less than its face value. When the going rate of interest is higher than the coupon rate, this condition arises. The value of the asset would increase over time. A higher coupon bond is one that sells for a higher price than its face value. When the going rate of interest is lower than the coupon rate, this condition arises. Its value will gradually decrease until it reaches its maturity value. A par value bond that sells at par, with a coupon rate equal to the current interest rate. The coupon is usually set at the going market rate on the day the bond is sold, so it sells at par at first.

Calculations:

C = Coupon Payments = $60 (Par Value x Coupon Rate)

n = number of years = 10

i = market rate or required yield = 7% = 0.007

K = number of coupon payments in 1 year = 1

P = value at maturity or par value = 1000

Present value of ordinary annuity formula:

Bond Price = C/k * [\frac{1 - \frac{1}{(1 + \frac{i}{k})^{nk}  } }{\frac{i}{k} } ] + \frac{P}{(1 + \frac{i}{k})^{nk}  }

Just plug in the values and you will get:

Bond Price = 60 x 7.02 + 508.35

Bond Price = 421.41 508.35

Bond Price = $929.76

Similarly,

Data:

C = Coupon Payments = $60 (Par Value x Coupon Rate)

n = number of years = 10

i = market rate or required yield = 7% = 0.007

K = number of coupon payments in 1 year = 2

P = value at maturity or par value = 1000

Present value of ordinary annuity formula:  

Bond Price = C/k * [\frac{1 - \frac{1}{(1 + \frac{i}{k})^{nk}  } }{\frac{i}{k} } ] + \frac{P}{(1 + \frac{i}{k})^{nk}  }

Just plug in the values and you will get:  

Bond Price = 30 x 14.21 + 502.57

Bond Price = 426.37 + 502.57

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Explanation:

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