Question

Mojo Mining has a bond outstanding that sells for $2,120 and matures in 18 years. The bond pays semiannual coupons and has a coupon rate of 6.66 percent. The par value is $2,000. If the company's tax rate is 40 percent, what is the aftertax cost of debt?
A. 3.96%
B. 6.24%
C. 5.82%
D. 3.66%
E. 3.45%

Answer 1

Answer:

D. 3.66%

Explanation:

For computing the after tax cost of debt we need to apply the RATE formula i.e to be shown in the attachment

Given that,  

Present value = $2,120

Future value or Face value = $2,000

PMT = $2,000 × 6.6% ÷ 2 = $66.60

NPER = 18 years × 2 = 36 years

The formula is shown below:  

= Rate(NPER;PMT;-PV;FV;type)  

The present value come in negative  

So, after solving this,  

1. The pretax cost of debt is 3.05% × 2 % = 6.10%

2. And, the after tax cost of debt would be

= Pretax cost of debt × ( 1 - tax rate)

= 6.10% × ( 1 - 0.40)

= 3.66%