Question

XYZ Company has a bond outstanding with 30 years remaining to maturity, a coupon rate of 8%, and semi-annual payments. If the current market price is $1,196.90, and the par value is $1,000, what is the after-tax cost of debt if the tax rate is 40%?

Select one:

a. 3.90%

b. 6.60%

c. 3.82%

d. 3.98%

e. 4.80%

Answer 1

Face/Par Value of bond = $1000

Semi-Annual Coupon Bond = $1000*8%*1/2

= $40

No of coupon Payments =No of years to maturity*2 = 30 years*2

= 60

Current price of Bond = $1196.90

calculating the Semi-annual YTM of Bond using Excel "Rate" function:-

Semi-annual YTM = 3.25%

Annual YTM = 3.25%*2

Annual YTM = 6.50%

- After-Tax cost of Debt = Annual YTM*(1- Tax Rate)

After-Tax cost of Debt = 6.50%*(10.40)

After-Tax cost of Debt = 3.90%

Option A

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