Question

0.5/1 Question 6 View Policies Show Attempt History Current Attempt in Progress You are analyzing the cost of debt for a firm. You know that the firm's 14-year maturity, 7.8 percent coupon bonds are selling at a price of $683.00. The bonds pay interest semiannually. If these bonds are the only debt outstanding for the firm, answer the following questions. (21) Your answer is correct. What is the current YTM of the bonds? (Round final answer to 2 decimal places, e.g. 15.25%.) Current YTM for the bonds 12.70 % eTextbook and Media Attempts: 1 of 3 used (22) What is the after-tax cost of debt for this form if it has a 30 percent marginal and average tax rate? (Round final answer to 2 decimal places, eg. 15.25%.) After-tax cost of debt e Textbook and Media Attempts: 0 of 3 used Save for Later Submit Answer

Answer 1

1)

Coupon = (0.078 * 1000) / 2 = 39

Number of periods = 14 * 2 = 28

YTM = 12.70%

Keys to use in a financial calculator:

2nd P/Y 2

FV 1000

PV -683

PMT 39

N 28

CPT I/Y

2)

After tax cost of debt = YTM (1 - tax)

After tax cost of debt = 0.127 (1 - 0.3)

After tax cost of debt = 0.0889 or 8.89%