Question

You are analyzing the after-tax cost of debt for a firm. You know that the firm’s 12-year maturity, 7.50 percent semiannual coupon bonds are selling at a price of $1,000.00. These bonds are the only debt outstanding for the firm.

What is the current YTM of the bonds? (Round final answer to 2 decimal places, e.g. 15.25%.)

YTM

%

What is the after-tax cost of debt for this firm if it has a marginal tax rate of 34 percent? (Round intermediate calculations to 4 decimal places, e.g. 1.2514 and final answer to 2 decimal places, e.g. 15.25%.)

After-tax cost of debt

%

What is the current YTM of the bonds and after-tax cost of debt for this firm if the bonds are selling at par? (Round intermediate calculations to 4 decimal places, e.g. 1.2514 and final answers to 2 decimal places, e.g. 15.25%.)

YTM		%
After-tax cost of debt		%

Answer 1

a) Current YTM YTM = Interest + (Redemption Value- Market Value/Years to maturity (Redemption Value + Market Price)/2 75+ (1000-1000)/12 (1000+1000)/2 = 7.50% 2) After tax cost of debt = Interest rate *(1-tax rate) =7.50%* (1-0.34) -4.95% 3) YTM =7..50% After tax cost of debt =4.95%