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

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

Finance

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?

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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%

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