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Homework answers / question archive / To calculate the after-tax cost of debt, multiply the before-tax cost of debt by Perpetualcold Refrigeration Company (PRC) can borrow funds at an interest rate of 12
To calculate the after-tax cost of debt, multiply the before-tax cost of debt by Perpetualcold Refrigeration Company (PRC) can borrow funds at an interest rate of 12.50% for a period of seven years. Its marginal federal-plus-state tax rate is 25%. PRC's after-tax cost of debt is (rounded to two decimal places). At the present time, Perpetualcold Refrigeration Company (PRC) has 5-year noncallable bonds with a face value of $1,000 that are outstanding. These bonds have a current market price of $1,229.24 per bond, carry a coupon rate of 10%, and distribute annual coupon payments. The company incurs a federal-plus-state tax rate of 25%. If PRC wants to issue new debt, what would be a reasonable estimate for its after-tax cost of debt (rounded to two decimal places)? (Note: Round your YTM rate to two decimal place.) O 3.20% O 2.85% O 4.27% 3.56%
Answer : To calculate the after-tax cost of debt, multiply the before-tax cost of debt by (1 - Tax rate).
After Tax Cost of Debt = 12.50 * (1 - 0.25) = 9.375%
Calculate of YTM of the bond :
Using Financial Calculator
=RATE(nper,pmt,pv,fv)
where nper is Number of years to maturity i.e 5
pmt is Interest payment i.e 1000 * 10% =100
pv is Current Market Price
= - 1229.24
Note : pv should be taken as negative.
fv is face value i.e 1000
=RATE(5,100,-1229.24,1000)
therefore ,Before Tax cost of Debt is 4.74%
After Tax Cost of Debt = 4.74% * (1 - 0.25) = 3.56%
