The 6% semiannual coupon, 7-year notes of Woodbine Transportation, Inc

Finance Jan 13, 2021

The 6% semiannual coupon, 7-year notes of Woodbine Transportation, Inc. trade for a price of 94.54. What is the company's after-tax cost of debt capital if its marginal tax rate is 30%?

Expert Solution

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

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

Please remember that the payments rae semi-annual

nper=7 years*2=14

pmt=semi-annaul coupon=(coupon rate*face value)/2=(6%*1000)/2=60/2=30

pv=94.54%*face value=94.54%*1000=945.4

fv=1000

=RATE(14,30,-945.4,1000,0)=3.50%

pre tax cost of debt=2*3.50%=7%

after tax cost of debt=pre tax cost of debt*(1-tax rate)=7.0%*(1-30%)=4.9%

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