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In: Finance

For a 3 year annual bond, currently priced at $78, par value $100, with coupon rate...

For a 3 year annual bond, currently priced at $78, par value $100, with coupon rate 3%. tax rate by 30%. How much is the cost of debt after tax? Remember to keep at least 4 decimals.

Expert Solution

Current Price = $78

Face Value of Bond = $100

Time to Maturity = 3 Years

Coupon Rate = 3%

Tax Rate = 30%

Coupon Amount = Coupon Rate * Face Value

Coupon Amount = 3% * 100 = $3

Price of Bond = Present Value of Coupon Payment + Present Value of Face Value

PV of Bond =

This discount rate can be back calculated given all other values. It can be done with the help of excel easily. Excel formula and output screenshots are attached as a part of this calculation.

Thus Yield on this bond is 12.1895%. This is the pre - tax cost of debt.

Post Tax Cost of Debt = Pre Tax Cost of Debt * (1 - Tax Rate)

Post Tax Cost of Debt = 12.1895% * (1 - 30%)

Post Tax Cost of Debt = 12.1895% * 70%

Post Tax Cost of Debt = 8.5327%

Post - Tax Cost of debt is 8.5327% p.a.

jeff jeffy answered 2 years ago

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