Question

2. An overview of a firm's cost of debt To calculate the after-tax cost of debt, multiply the before-tax cost of debt by Omni Consumer Products Company (OCP) can borrow funds at an interest rate of 10.20% for a period of seven years. Its marginal federal-plus-state (rounded to two decimal places) tax rate is 25%. OCP's after-tax cost of debt is At the present time, Omni Consumer Products Company (OCP) has 20-year noncallable bonds with a face value of $1,000 that are outstanding. These bonds have a current market price of $1,181.96 per bond, carry a coupon rate of 13%, and distribute annual coupon payments. The company incurs a federal-plus-state tax rate of 25%. If OCP wants to issue new debt, what would be a reasonable estimate for its after-tax cost of debt (rounded to two decimal places)? (Note: Round your YTM rate to two decimal place.) 9.67% 8.06% 6.45% 9.27% Grade It Now Save & Continue Continue without saving

Answer 1

Question 1: Answer is "1 - Tax Rate"

After tax cost of debt = Pretax cost of debt * (1 - Tax rate)

Question 2:

After tax cost of debt = Pretax cost of debt * (1 - Tax rate)

After tax cost of debt = 10.20% * (1 - 25%) = 7.65%

Question 3:

A В С 1 2 Par Value 3 Coupon Rate 4 Current Value 5 Years to Maturity 6 Frequency $1,000 13.00% $1,181.96 20 1 annual 7 8 YTM (pretax cost of debt) 9 Tax Rate 10 Post tax cost of debt 10.75% 25.00% 8.06% 11

A B C 2 Par Value 3 Coupon Rate 1000 0.13 4 Current Value 1181.96 5 Years to Maturity 6 Frequency 20 annual 1 7 -B6*RATE(B5*B6,B3*B2/B6,-B4,B2) 8 YTM (pretax cost of debt) 9 Tax Rate 0.25 10 Post tax cost of debt B8* (1-B9) 11