Question

Suppose your firm just issued a 20-year, $1000 par value bond with semiannual coupons. The coupon interest rate is 9%. The bonds sold for par value, but flotation costs amounted to 5% of the price. You have a 21% corporate tax rate. What is your firm’s after-tax cost of debt?

Answer 1

After tax cost of debt is 7.56%

Step-1:Calculation of before tax cost of debt
Before tax cost of debt	=rate(nper,pmt,pv,fv)*2
	= 9.57%
Where,
nper	=	40
pmt	=	$               45
pv	=	$           -950
fv	=	$         1,000
Step-2:Calculation of after tax cost of debt
After tax cost of debt	=	Before tax cost of debt	*	(1- Tax Rate)
	=	9.57%	*	(1-0.21)
	=	7.56%