Question

Keys Printing plans to issue 20-year non-callable bonds at par value. The bonds would pay a 8.40% annual coupon, paid semi-annually. The company's marginal tax rate is currently 36%, but Congress is considering a change in the corporate tax rate to 25%. By how much (i.e., what is the rate difference) would Keys' after-tax cost of debt change if the new tax rate is adopted? Enter your answer in decimal format to four decimal places (e.g., 1.83% would be entered as .0183).

Answer 1

In case Bonds are issued at par value ,Bonds market rate of interest is equals to coupon rate on bond = 8.40%

Bond After tax cost of debt (current) =Before tax cost of debt (1-Tax rate)

                                             = 8.40 (1- .36)

                                             = 8.40 * .64

                                             = 5.376%

Bond After tax cost of debt (revised) = 8.40 (1-.25)

                                    = 8.40 *.75

                                     = 6.3%

change in after tax cost of debt = 6.3 -5.376= .924 %   (enter as .0092)