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Calculate the after-tax cost of debt for the following bond. The face value of the bond...

Calculate the after-tax cost of debt for the following bond. The face value of the bond is $1,000, interest is paid annually, the coupon rate is 9%, and the bond matures in 11 years. Assume that the corporate tax rate is 38% and the issue price of the bond was $850. The after- tax costs of debt for the bond is _%.

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Answer #1

Bond Par Value = $1,000

Bond Present Value = $850

Coupon Rate = 9% annually

Time to Maturity = 11 years

Calculating YTM of Bond,

I = [FV = 1,000, PV = 850, T = 11, PMT = 90]

I = 11.47%

Tax Rate = 38%

After-tax cost of debt = (1 - 0.38)(0.1147)

After-tax cost of debt = 7.11%

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