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The Zephyr Corporation is contemplating a new investment to be financed 33 percent from debt. The...

The Zephyr Corporation is contemplating a new investment to be financed 33 percent from debt. The firm could sell new $1,000 par value bonds at a net price of $930. The coupon interest rate is 9 percent and the bonds would mature in 18 years. If the company is in a 38 percent tax bracket, what is the after-tax cost of capital to Zephyr for bonds?

Expert Solution

Information provided:

Par value= future value= $1,000

Present value= $930

Coupon rate= 9%

Coupon payment= 0.09*1,000= $90

Time= 18 years

Tax arte= 38%

The question is solved by first computing the before tax cost of debt. The yield to maturity is computed for it.

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

FV= 1,000

PV= -930

PMT= 90

N= 18

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

The value obtained is 9.8450.

Therefore, the before tax cost of debt is 9.8450.

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

= 9.8450%*(1 – 0.38)

= 6.10%.

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

jeff jeffy answered 1 year ago

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