Question

Question 19 3 pts The Heinlein Inc. has determined that it could issue $1,000 face value bonds with an 8% coupon (paid semi-annually) and a 10-year maturity, at $1,025 per bond. If Heinlein's marginal tax rate is 23%, what is its after-tax cost of debt? O 6% < after-tax cost of debt after-tax cost of debt < 3% 5% < after-tax cost of debt < 6% 4% <a after-tax cost of debt < 5% O 3% < after-tax cost of debt < 4%

Answer 1

Bond price =C*[1-(1+YTM)^-n / YTM] + [P/(1+YTM)^n]
Where,
C= Coupon amount
YTM = Yield To maturity
n = Number of periods
P= Par value
$1025=40 * [1 - (1 + YTM)^-20 / YTM] + [1000 / (1 + YTM) ^20]
YTM =	3.82%
Annually	7.64%
After-tax cost of debt = cost of debt ×(1-tax rate)
=0.0764× (1-0.23)
=0.0764× 0.77
=5.88 %
Correct Option : 5%< After tax cost of debt <6%