Answered

Rockingham Motors issued a 30-year, 8 percent semiannual bond 3 years ago. The bond currently sells for 103.1 percent of its face value. The company's tax rate is 34 percent. What is the aftertax cost of debt?

Answer :

beritop1089

Answer:

5.10%

Explanation

Since coupons are paid semi-annually, adjust the time and coupon payment amount to semiannual basis.

Face value of the bond ; FV = 1,000

Maturity of the bond ; N = 30*2 = 60

Price of the bond; PV = - ( 1.031 * 1000) = -1,031

Semi-annual coupon payment; PMT = (8%/2)*1,000 = 40

Then compute semiannual interest rate ; CPT I/Y = 3.866%

Next, convert the 3.866% to annual rate (YTM) = 3.866% * 2 = 7.732%

Therefore, pretax cost of debt is 7.732%

Aftertax cost of debt = pretax cost of debt (1-tax)

= 0.07732(1-0.34)

= 0.0510 or 5.10%

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