Question

JPR, Inc has one outstanding bond issue, which has seventeen years remaining to maturity and a coupon rate of 4.875%. Interest payments are made semi-annually, the firm’s tax rate is .40, and the bonds are currently trading at $928.00.
a. What is the yield to maturity on the bonds?
b. Ignoring flotation costs, what is the firm’s cost of debt (before tax)?
c. What is its after-tax cost of debt?

Answer 1

a.

Calculating Yield to Maturity,

Using TVM Calculation,

I = [FV = 1,000, PV = -928, PMT = 24.375, N = 34]

I = 5.53%

b.

Cost of Debt = 5.53%

c.

After-tax cost of debt = (1 - 0.40)(0.0553) = 3.32%