In: Finance
Charter Corp. has issued 1588 debentures with a total principal value of $1588000. The bonds have a coupon interest rate of 6%. a. What dollar amount of interest per bond can an investor expect to receive each year from Charter? b. What is Charter's total interest expense per year associated with this bond issue? c. Assuming that Charter is in a 35% corporate tax bracket, what is the company's net after-tax interest cost associated with this bond issue?
Part (a) | |||||||
Total value of bond's principal | $ | 1588000 | |||||
No. of bonds | 1588 | ||||||
Par value per bond | (total principal/no. of bonds) | 1000 | |||||
Coupon interest rate | 6% | p.a. | |||||
So, Interest received each per per bond is 1000*6% = | $ | 60 | |||||
Part (b) | |||||||
Interest cost per bond | $ | 60 | |||||
Multiplied with no. of shares | 1588 | ||||||
Interest cost each year | $ | 95280 | |||||
So, Charter's total interest expense per year associated with bond issue is $95,280. | |||||||
Part © | |||||||
After tax interest cost = Interest * (1 - tax rate) | |||||||
tax rate = 35% | |||||||
So, After tax interest cost = 95280 * (1 - 0.35) | |||||||
61932 | |||||||
So, After tax interest cost associated with bond issue is $61,932. |