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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?

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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 9 months ago
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