RAZR Industries issued a 25 year bond, with a coupon of 8%, making semi-annual payments and a par value of $1,000. The bond currently sells for 108% of par. The company's tax rate is 21%.
1) Calculate the before tax cost of debt.
2) Calculate the after tax cost of debt.
Information provided:
Par value= future value= $1,000
Current price= present value= 108%*1,000= $1,080
Time= 25 years*2= 50 semi-annual periods
Coupon rate= 8%/2= 4%
Coupon payment= 0.04*1,000= $40
1.The before tax cost of debt is calculated by computing the yield to maturity.
Enter the below in a financial calculator to compute the yield to maturity:
FV= 1,000
PV= -1,080
PMT= 40
N= 50
Press the CPT key and I/Y to compute the yield to maturity.
The value obtained is 2.2885.
Therefore, the before tax cost of debt is 2.2885%*2= 4.5770%. 4.58%.
2.After tax cost of debt= before tax cost of debt*(1 – 0.2)
= 0.0458*(1 – 0.21)
= 0.0362*100
= 3.62%.
In case of any query, kindly comment on the solution.
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