Question
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 thefirm’s tax rate is 40%.What is theafter-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.
jeff jeffy answered 10 months agoRelated Solutions
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