Question

Rockingham Motors issued a 30-year, 8 percent semiannual bond 3 years ago. The bond currently sells for 103.1 percent of its face value. The company's tax rate is 34 percent. What is the aftertax cost of debt?

Answer 1

1	Face value (FV)	$                                            1,000
2	Coupon rate	8.00%
3	Number of compounding periods per year	2
1*2/3	Interest per period (PMT)	$                                            40.00
	Bond price (PV)	$                                    (1,031.00)
4	Number of years to maturity	27
5 = 4*3	Number of compounding periods till maturity (NPER)	54
	Bond yield to maturity	RATE(NPER,PMT,PV,FV)*2
	Bond yield to maturity	7.72%
	(Pre-tax cost of debt)
	Bond yield to maturity	5.10%
	(After-tax cost of debt)	7.72%*(1-34%)