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A firm is 65% equity and 35% debt. The firm's marginal tax rate is 40%. Their...

A firm is 65% equity and 35% debt. The firm's marginal tax rate is 40%. Their bonds trade for $990, mature in nine years, have a par value of $1,000, a coupon rate of 8.00% and pay semi-annually. The firm's common stock trades for $27 and just paid a dividend of $5.00. Dividends are expected to grow at 3% forever. The firm's after tax cost of debt is _____%.

PLEASE USE FINNACE CALUATLER FOR ANSWER IF NOT USE BASIC CALUATOR WITH SOULUIONS EASY TO FOLLOW

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Expert Solution

Information provided:

Par value= future value= $1,000

Current price= present value= $990

Coupon rate= 8%/2= 4%

Coupon payment= 0.04*1,000= $40

Time= 9 years*2=18 semi-annual periods

The question is solved by first calculating the before tax cost of debt which is the yield to maturity.

Enter the below in a financial calculator to compute the yield to maturity:

FV= 1,000

PV= -990

PMT= 40

N= 18

The value obtained is 4.0795%.

The before tax cost of debt= 4.0795%*2= 8.1590%.

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

                                        = 8.1590%*(1- 0.40)

                                        = 4.8964%4.90%.

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

jeff jeffy answered 6 months ago
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