Question

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 $1,052.38. The bonds pay interest semiannually. If these bonds are the only debt outstanding for the firm, answer the following questions.

What is the current YTM of the bonds? (Round final answer to 2 decimal places, e.g. 15.25%.)

Current YTM for the bonds

%

What is the after-tax cost of debt for this firm if it has a 30 percent marginal and average tax rate? (Round final answer to 2 decimal places, e.g. 15.25%.)

After-tax cost of debt

%

Answer 1

Given,

Present value (PV) = $ 1052.38

Maturity = 14 years

Semi annual periods (n) = 14 x 2 = 28

Coupon rate = 7.8 %

Semi annual coupon rate = 7.8%/2 = 3.9%

Face value (FV) = $ 1000

Semi annual Coupon payment (C) = $ 1000 x 3.9% = $ 39

Solution :-