Question

Mojo Mining has a bond outstanding that sells for $2,201 and matures in 21 years. The bond pays semiannual coupons and has a coupon rate of 7.38 percent. The par value is $2,000. If the company's tax rate is 40 percent, what is the aftertax cost of debt

Answer 1

Answer:

the after tax cost of debt is 3.90 %.

Explanation:

The Cost of debt is the rate required on the bond and this is calculated as follows :

PV = - $2,201

n = 21 × 2 = 42

PMT =  ($2,000 × 7.38 %) ÷ 2 = $73.80

P/YR = 2

FV = $2,000

r = ?

Using a Financial Calculator, the Pre-tax Cost of debt, r is 6.4963% or 6.50 % (2 decimal places)

After tax cost of debt = Interest rate × (1 - tax rate)

                                   = 6.50 % × (1 - 0.40)

                                   = 3.90 %