Question

USA manufacturing issued 30 year 7.50% semi annual bonds 6 years ago. the bonds currently sell at 101% of face value. what is the firms after tax cost of debt if the tax rate is 35% please tell me how to solve on financial calculator ba 2 plus if possible, if not possible by hand please.

Answer 1

Information provided:

Face value= future value= $1,000

Current price= present value= 101%*1,000= $1,010

Coupon rate= 7.50%/2= 3.75%

Coupon payment= 0.0375*1,000= $37.50

Time= 30 years – 6 years= 24 years*2= 48 semi-annual periods

Tax rate= 35%

The question is solved by first solving the before tax cost of debt. The yield to maturity is calculated for computing the before tax cost of debt.

Enter the below in a financial calculator to compute the yield to maturity:

FV= 1,000

PV= -1,010

N= 48

PMT= 37.50

Press the CPT key and I/Y to compute the yield to maturity.

The value obtained is 3.7051.

The before tax cost of debt= 3.7051%*2= 7.4102%

After tax cost of debt= before tax cost of debt*(1 – tax rate)

                                         = 7.4102%*(1 – 0.35)

                                         = 4.8167%   4.82%.

In case of any query, kindly comment on the solution.