Question

Waller, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 20 years to maturity with a current price of $854. The issue makes semiannual payments and has coupon rate of 5 percent. If the tax rate is 0.37, what is the aftertax cost of debt? Enter the answer with 4 decimals (e.g. 0.0123)

Answer 1

Face value S1,000 2.5% Per period = 40 Periods Coupon rate Term 20 Years* 2 5%* 6/12 = Current price of stock Tax rate 0.37 $854 Face value Coupon rate = $1,000* 2.5% $25 Coupon amount Cost of debt, YTM = [Coupon amount [S25(S1,000 $854)/40]/[0.6 * $854 0.4 * $1,000 ] (Maturity value - Net proceeds) Term] / [0.6* Net proceeds +0.4* Maturity vahue ] $28.65 $912.4 = 0.031400701 3.1400701 % = 3.1400701 % Per period* 2 6.2801402 % Per annum Cost of debt, YTM After-tax cost of debt = Cost of debt* (1 - Tax rate) = 6.2801402 % * ( 1 - 0.37) = 3.956488326 % = 3.9565 % (Rounded) Ans After-tax cost of debt 3.9565 %