The maturity of a bond is 12 years, coupon rate is 10

Finance Oct 20, 2020

The maturity of a bond is 12 years, coupon rate is 10.5% face value (par value) is R1000. The bond is priced to sell at 88.14. The tax rate is 40%. Compute the after-tax cost of debt?

Expert Solution

We can calculate the pretax cost of debt by using the following formula in excel:-

=rate(nper,pmt,-pv,fv)

Here,

Rate = Pretax cost of debt

Nper = 12 periods

Pmt = Coupon payment = 1000*10.5% = 105

PV = 1000*88.14 = 881.40

FV = 1000

Substituting the values in formula:

= rate(12,105,-881.40,1000)

= 12.46%

After tax cost of debt = Pretax cost of debt * (1 - Tax rate)

= 12.46% * (1 - 40%)

= 7.47%

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