Question

Mojo Mining has a bond outstanding that sells for $2,183 and matures in 19 years. The bond pays semiannual coupons and has a coupon rate of 7.22 percent. The par value is $2,000. If the company's tax rate is 35 percent, what is the aftertax cost of debt? Multiple Choice 6.12% 4.15% 4.52% 3.94% 6.56%

Answer 1

Coupon = (0.0722 * 2000) / 2 = 72.2

Number of periods = 19 * 2 = 38

YTM = 6.38205%

Keys to use in a financial calculator:

2nd I/Y 2

FV 2000

PV -2183

PMT 72.2

N 38

CPT I/Y

After tax cost of debt = YTM (1 - tax)

After tax cost of debt = 0.0638205 (1 - 0.35)

After tax cost of debt = 0.0415 or 4.15%