10 -13.19 You are analyzing the after-tax cost of debt for a firm. You know that

Question

10 -13.19

You are analyzing the after-tax cost of debt for a firm. You know that the firm's 12-year maturity, 8.25 percent semiannual coupon bonds are selling at a price of $863.06. If these bonds are the only debt outstanding for the firm. What is the current YTM of the bonds? (Round intermediate calculations to 4 decimal places, e.g. 1.2514 and final answer to 2 decimal places, e.g. 15.25%.) 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%.) 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 answer to 2 decimal places, e.g. 15.25%.)

Explanation / Answer

YTM = Coupon+FV-BV/n//FV+BV/2 Coupon = 1000*8.25%/2 $41.25 FV = Face Value = $ 1000 BV = Bond Value = $863.06 n = 12*2 = 24 YTM = 41.25+(1000-863.06)/24//(1000+863.06)/2 41.25+ 5.7/931.53 46.95/931.53 5.04*2 YTM = 10.08% If selling at par YTM = 41.25+(1000-1000)/24//(1000+1000)/2 YTM = 8.24%

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