Your company is going to issue a par bond with 8% coupon rate. Suppose you predict...

Question

Question

The answer is 0.40% but I have no idea how you get to that. If you can explain how, that would be a big help. Thanks.

Answer 1

Answer #1

Given the bond would be issued at par, coupon rate would be equal to the par value of the bond.

Post tax cost of debt = pretax cost of debt * (1 - Tax Rate)

When tax rate = 35%,

Post tax cost of debt = 8% * (1 - 35%) = 5.2%

When tax rate = 40%,

Post tax cost of debt = 8% * (1 - 40%) = 4.8%

Change = 5.2% - 4.8% = 0.40%

Answer 2

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