Question

10.02

10.03

Quantitative Problem: 5 years ago, Barton Industries issued 25-year noncallable, semiannual bonds with a $1,000 face value and a 10% coupon, semiannual payment ($50 payment every 6 months). The bonds currently sell for $841.87. 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

1.

Calculating YTM,

Using TVM Calculation,

I = [PV = -841.87, FV = 1,000, PMT = 50, N = 50]

I = 12.01%

After-tax cost of Debt = (1 - 0.25)(0.1201)

After-tax cost of Debt = 9.01%

2.

Cost of Preferred Stock = 3.35/51

Cost of Preferred Stock = 6.57%