QUESTION 35 3 points Save Answe Suppose you are trying to estimate the after tax

Question

QUESTION 35 3 points Save Answe Suppose you are trying to estimate the after tax cost of debt for a firm as part of the calculation of the Weighted Average Cost of Capital (WACC). The corporate tax rate for this frm ls 37% The firm's bonds pay interest semiannually with a 5 7% coupon rate and have a maturity of 6 years. If the current price of the bonds is $932 56, what is the after tax cost of debt for this firm? (Answer to the nearest tenth of a percent, eg 12.3% but do not use a percent sign)

Explanation / Answer

1 Face value (FV) $                                        1,000 2 Coupon rate 5.70% 3 Number of compounding periods per year                                                    2 1*2/3 Interest per period (PMT) $                                        28.50 Bond price (PV) $                                   (932.56) 4 Number of years to maturity 6 5 = 4*3 Number of compounding periods till maturity (NPER)                                                  12 Bond yield to maturity RATE(NPER,PMT,PV,FV)*2 Bond yield to maturity 7.1% (Pre-tax cost of debt) Bond yield to maturity 4.5% (After-tax cost of debt) 7.10%*(1-37%)

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