A firm issues a 20-year semi-annual payment bond, which is priced at $1213

Finance Apr 19, 2021

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%

Expert Solution

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%".

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