Cost of Debt
Jones, Inc has one outstanding bond issue, which has twelve years remaining to maturity and a coupon rate of 2.325%. Interest payments are made semi-annually, the firm’s tax rate is .35, and the bonds are currently trading at $1,021.00.
What is the yield to maturity on the bonds?
Ignoring flotation costs, what is the firm’s cost of debt (before tax)?
What is its after-tax cost of debt?
using excel rate function
Yield to maturity =
RATE(number_of_periods, payment_per_period, present_value, [future_value], [end_or_beginning], [rate_guess]) * number of compounds per year
= RATE(24,2.325%*1000/2,-1021,1000) * 2
= 2.13%
before tax cost of debt = 2.13%
after tax cost of debt = 2.13% * (1-0.35)
= 1.39%
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