A firm recently issued $1,000 par value, 15-year bonds with a coupon rate of 7

Finance Dec 22, 2020

A firm recently issued $1,000 par value, 15-year bonds with a coupon rate of 7.5%. Coupon interest payments will be paid semi-annually. The bonds sold at par value, but the firm paid flotation costs amounting to 5% of par value. The firm has a marginal tax rate of 34%. What is the firm's after-tax cost of debt for these bonds?

Expert Solution

Cost of debt

K = Nx2

Bond Price *(1-flotation %) =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k] + Par value/(1 + YTM/2)^Nx2

k=1

K =15x2

1000*(1-0.05) =∑ [(7.5*1000/200)/(1 + YTM/200)^k] + 1000/(1 + YTM/200)^15x2

k=1

YTM = 8.0811535021

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

After tax cost of debt = 8.0811535021*(1-0.34)

= 5.33%

Archived Solution

Unlocked Solution

You have full access to this solution. To save a copy with all formatting and attachments, use the button below.

Already a member? Sign In

Important Note: This solution is from our archive and has been purchased by others. Submitting it as-is may trigger plagiarism detection. Use it for reference only.

For ready-to-submit work, please order a fresh solution below.

Or get 100% fresh solution

Get Custom Quote