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At the present time, Andalusian Limited (AL) has 10-year noncallable bonds with a face value of...

At the present time, Andalusian Limited (AL) has 10-year noncallable bonds with a face value of $1,000 that are outstanding. These bonds have a current market price of $1,495.56 per bond, carry a coupon rate of 10%, and distribute annual coupon payments. The company incurs a federal-plus-state tax rate of 45%. If AL 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.)

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Answer #1

After-tax cost is calculated using the RATE function as follows:-

=RATE(nper,pmt,pv,fv)*(1-tax)

=RATE(10,10%*1000,-1495.56,1000)*(1-0.45)

=2.15%

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