Abascus limited issued 15 year, 14% bonds five years ago. The bond which has a face...

Abascus limited issued 15 year, 14% bonds five years ago. The bond which has a face value of Rs. 100 is currently selling for Rs. 108.

a. What is the pre tax cost of debt?

b. What is the after tax cost of debt.

Expert Solution


		12.00%		13.00%
Year	Cash Flow	PV factor = 1/ (1+r)^t	PV	PV factor = 1/ (1+r)^t	PV
0	$ (108.00)	1.000	$ (108.00)	1.000	$ (108.00)
1	$ 14.00	0.893	$ 12.50	0.885	$ 12.39
2	$ 14.00	0.797	$ 11.16	0.783	$ 10.96
3	$ 14.00	0.712	$ 9.96	0.693	$ 9.70
4	$ 14.00	0.636	$ 8.90	0.613	$ 8.59
5	$ 14.00	0.567	$ 7.94	0.543	$ 7.60
6	$ 14.00	0.507	$ 7.09	0.480	$ 6.72
7	$ 14.00	0.452	$ 6.33	0.425	$ 5.95
8	$ 14.00	0.404	$ 5.65	0.376	$ 5.27
9	$ 14.00	0.361	$ 5.05	0.333	$ 4.66
10	$ 14.00	0.322	$ 4.51	0.295	$ 4.12
10	$ 100.00	0.322	$ 32.20	0.295	$ 29.46
		Total	$ 3.30	Total	$ (2.57)

NPV @ 0.12	$ 3.30
NPV @ 0.13	$ (2.57)
Difference in both	$ 5.87

YTM	=Lower rate + Difference in rates*(NPV at lower rate)/(Lower rate NPV-Higher rate NPV)

	'=12%+ (13%-12%)*(3.3004/(3.3004+2.5737)
YTM	12.56%

Tax rate	30.00%	Assumed as not given in the question
After-tax cost	12.56% * (1-30%)
After-tax cost	8.79%

jeff jeffy answered 13 hours ago

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