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 answers to 2 decimal places, e.g. 15.25%.)

Explanation / Answer

YTM = [Coupon Payment + (Face Value - Current price) / n] / (Face Value + Current price) / 2

Assuming Par Value is $1000

YTM = [82.5 + (1000 - 825)/ 12] / (1000+825)/2

= 97.083 / 912.50 * 100

= 10.6392%

YTM = 10.6392%

After tax cost of debt = 8.25% (1-.34) = 5.445%

If bond is selling at par, YTM = Coupon rate = 8.25%

After tax cost of debt remains the same at 5.445% as calculated above.

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