Question
In: Finance
Great Seneca Inc. sells $100 million worth of 23-year to maturity 6.50% annual coupon bonds. The...
Great Seneca Inc. sells $100 million worth of 23-year to maturity 6.50% annual coupon bonds. The net proceeds (proceeds after flotation costs) are $985 for each $1,000 bond. The firm's marginal tax rate is 40%. What is the after-tax cost of capital for this debt financing?
Solutions
Expert Solution
Information provided:
Par value= future value= $1,000
Current price= present value= $985
Time= 23 years
Coupon rate= 6.5%
Coupon payment= 0.065*1,000= $65
Enter the below in a financial calculator to compute the yield to maturity:
FV= 1,000
PV= -985
N= 23
PMT= 65
Press the CPT key and I/Y to compute the yield to maturity.
The value obtained is 6.6289.
Therefore, the before tax cost of debt is 6.6289%.
After tax cost of debt= before tax cost of debt*(1 – tax)
=6.6289*(1 – 0.40)
= 3.9773%
3.98%
In case of any query, kindly comment on the solution
jeff jeffy answered 11 months agoRelated Solutions
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