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Inc
Inc. sold a 10-year bond issue 3 years ago. The bond has a 6.45% annual coupon and a $1,000 face value. If the current market price of the bond is $980 and the tax rate is 30%, what is the after-tax cost of debt?
Select one:
a. 3.50%
b. 4.77%
c. 5.15%
d. 7.36%
e. 6.45%
Expert Solution
Computation of Cost of Debt using Rate Function in Excel:
=rate(nper,pmt,-pv,fv)
Here,
Rate = Cost of Debt = ?
Nper = 10 years -3 years = 7 years
PMT = $1,000*6.45% = $64.50
PV = $980
FV = $1,000
Substituting the values in formula:
=rate(7,64.50,-980,1000)
Rate or Cost of Debt = 6.82%
After-tax Cost of Debt = Cost of Debt*(1-Tax Rate)
= 6.82%*(1-30%)
After-tax Cost of Debt = 4.77%
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