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Homework answers / question archive / ABC Co is a manufacturing firm that issued a 5-year bond to finance a project

ABC Co is a manufacturing firm that issued a 5-year bond to finance a project

Finance

ABC Co is a manufacturing firm that issued a 5-year bond to finance a project.

Calculate the before-tax cost of debt and after-tax cost of debt given the following information:

Bond unit = R1000

Duration = 5 years

Discount rate = 3%

Flotation cost = 1%

Coupon rate = 8%

Tax rate = 25%

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ANSWER -

Use RATE function in EXCEL to find the before tax cost of debt

=RATE(nper,pmt,pv,fv,type)

nper=5 years

pmt=coupon rate*face value=8%*1000=80

pv=face value-(discount rate*face value)-(flotation cost*face value)=1000-(3%*1000)-(1%*1000)=1000-30-10=960

fv=1000

=RATE(5,80,-960,1000,0)=9.03%

before tax cost of debt=9.03%

after tax cost of debt=before tax cost of debt*(1-tax rate)=9.03%*(1-25%)=6.77%

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