Question

You are analyzing the cost of debt for a firm. You know that the firm's 14 year maturity, 6.6 percent coupon bonds are selling at a price of $964.67. The bonds pay interest semianinually. If these bonds are the only debt outstanding for the firm, answer the following questions What is the current YTM of the bonds? (Round final answer to 2 decimal places, eg. 15.25%.) Current YTM for the bonds wnat is the after-tax cost of debt for this firm if it has a 30 percent marginal and average tax rate? (Round final answer to 2 decimal places, e.g. 15.25%.) After-tax cost of debt

Answer 1

Bond Par Value = $1,000

Time to Maturity = 14 years

Coupon Rate = 6.6% semi-annually

Current Price = $964.67

a.

Calculating YTM,

Using TVM Calculation,

I = [FV = 1000, T = 28, PMT = 33, PV = -964.67]

I = 7.0%

b.

After tax cost of Debt = (1 - 0.30)(0.07)

After tax cost of Debt = 4.90%