Current cost of a bond: You know that the after-tax cost of debt capital for Bub

Question

Current cost of a bond: You know that the after-tax cost of debt capital for Bubbles Champagne is 8.3 percent. If the firm has only one issue of five-year maturity bonds outstanding, what is the current price of the bonds if the coupon rate on those bonds is 11.86 percent? Assume the bonds make semiannual coupon payments and the marginal tax rate is 30 percent.



(Omit the percent sign in your answer. Carry out all calculations to four decimal places and round your final answer to two decimal places, for example 7.80%.)

1. Pre-tax cost of debt capital =? %.



(Omit the dollar sign in your answer. Carry out all calculations to four decimal places and round your final answer to nearest whole dollar.)

2. Current price of the bonds = ?$.

Explanation / Answer

Semiannual Bond. So each year has 2 periods SO nper = 5 yrs = 5*2 = 10 periods Coupon =11.86%. If Face value is $1000, Coupon = 11.86%*1000/2 = $59.30 Post Tax yield = 8.3% & Tax rate is 30%. S0 Pre Tax yield = 8.3%/(1-30%) = 11.86% ...............Ans (1) So Semiannual yield = 11.86%/2 = 5.93% So current price of Bond = PV(Rate,nper,PMT,FV) = PV(5.93%,10,59.30,1000) = $1,000 .................Ans (2) As Yield = Coupon, Bonds Current price = Bonds Face value

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