Fill This Form To Receive Instant Help
Fill This Form To Receive Instant Help
Homework answers / question archive / A firm issues a 20-year semi-annual payment bond, which is priced at $1213
A firm issues a 20-year semi-annual payment bond, which is priced at $1213.55. The coupon rate of the bond is 9.00%. The tax rate is 30 percent. What is the after-tax cost of debt? _______%
6.8%
5.2%
4.9%
7%
Computation of Before-tax Cost of Debt using Rate Function in Excel:
=rate(nper,pmt,-pv,fv)*2
Here,
Rate = Before-tax Cost of Debt = ?
Nper = 20 years * 2 = 40 Periods
PMT = $1,000*9%/2 = $45
PV = $1,213.55
FV = $1,000
Substituting the values in formula:
=rate(40,45,-1213.55,1000)*2
Rate or Before-tax Cost of Debt = 7%
After-tax Cost of Debt = 7%*(1-Tax Rate) = 7%*(1-30%) = 4.90%
So, the correct option is 3rd "4.9%".
