Question

You are analyzing the after-tax cost of debt for a firm. You know that the firm’s 12-year maturity, 9.00 percent semiannual coupon bonds are selling at a price of $898.98. These bonds are the only debt outstanding for the firm. What is the current YTM of the bonds? (Round final answer to 2 decimal places, e.g. 15.25%.) YTM % LINK TO TEXT What is the after-tax cost of debt for this firm if it has a marginal tax rate of 34 percent? (Round intermediate calculations to 4 decimal places, e.g. 1.2514 and final answer to 2 decimal places, e.g. 15.25%.) After-tax cost of debt % LINK TO TEXT What is the current YTM of the bonds and after-tax cost of debt for this firm if the bonds are selling at par? (Round intermediate calculations to 4 decimal places, e.g. 1.2514 and final answers to 2 decimal places, e.g. 15.25%.) YTM % After-tax cost of debt % Click if you would like to Show Work for this question: Open Show Work LINK TO TEXT

Answer 1

K = Nx2

Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2

k=1

K =12x2

898.98 =∑ [(9*1000/200)/(1 + YTM/200)^k]     +   1000/(1 + YTM/200)^12x2

k=1

YTM% = 10.5

After tax rate = YTM * (1-Tax rate)

After tax rate = 10.5 * (1-0.34)

After tax rate = 6.93

When bond is at par

K = Nx2

Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2

k=1

K =12x2

1000 =∑ [(9*1000/200)/(1 + YTM/200)^k]     +   1000/(1 + YTM/200)^12x2

k=1

YTM% = 9

After tax rate = YTM * (1-Tax rate)

After tax rate = 9 * (1-0.34)

After tax rate = 5.94