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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.
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%
Expert Solution
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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