Great Seneca Inc. sells $100 million worth of 27-year to maturity 14.39% annual coupon bonds. The...
Great Seneca Inc. sells $100 million worth of 27-year to maturity 14.39% annual coupon bonds. The net proceeds (proceeds after flotation costs) are $981 for each $1,000 bond. The firm's marginal tax rate is 40%. What is the after-tax cost of capital for this debt financing?
Homework Answers
Face Value = $1,000
Current Price = $981
Annual Coupon Rate = 14.39%
Annual Coupon = 14.39% * $1,000
Annual Coupon = $143.9
Time to Maturity = 27 years
Let annual YTM be i%
$981 = $143.9 * PVIFA(i%, 27) + $1,000 * PVIF(i%, 27)
Using financial calculator:
N = 27
PV = -981
PMT = 143.9
FV = 1000
I = 14.68%
Annual YTM = 14.68%
After Cost of Debt = Annual YTM * (1- tax rate)
After Cost of Debt = 14.68% * (1- 0.40)
After Cost of Debt = 8.808%
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