Question

Quantitative Problem: 5 years ago, Barton Industries issued 25-year noncallable, semiannual bonds with a $1,000 face value and a 12% coupon, semiannual payment ($60 payment every 6 months). The bonds currently sell for $845.87. If the firm's marginal tax rate is 25%, what is the firm's after-tax cost of debt? Do not round intermediate calculations. Round your answer to two decimal places.

Answer 1

K = Nx2

Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2

k=1

K =20x2

845.87 =∑ [(12*1000/200)/(1 + YTM/200)^k]     +   1000/(1 + YTM/200)^20x2

k=1

YTM% = 14.36

After tax rate = YTM * (1-Tax rate)

After tax rate = 14.36 * (1-0.25)

After tax rate = 10.77