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In: Finance

Tiny Tots has debt outstanding, currently selling for $830 per bond. It matures in 12 years,...

Tiny Tots has debt outstanding, currently selling for $830 per bond. It matures in 12 years, pays interest annually, and has a 12% coupon rate. Par is $1000, and the​firm’s tax rate is 40​%.What is the​after-tax cost of debt?

Solutions

Expert Solution

Information provided:’

Par value= future value= $1,000

Present value= $830

Time= 12 years

Coupon rate= 12%

Coupon payment= 0.12*1,000= $120

Tax rate= 40%

The question is solved by first computing the before tax cost of debt.

The below has to be entered in a financial calculator to compute the yield to maturity:

FV= 1,000

PV= -830

N= 12

PMT= 120

Press the CPT key and I/Y to compute the yield to maturity.

Therefore, the before tax cost of debt is 15.16%.

The after tax cost of debt is calculated using the below formula:

After tax cost of debt= Before tax cost of debt*(1- tax rate)

                                        = 15.16%*(1-0.40)

                                        = 9.0960%.

Therefore, the after tax cost of debt is 9.10%.

In case of any query, kindly comment on the solution.


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