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AlexFokin [52]
1 year ago
11

A corporate bond has a face value of $1,000 and a coupon rate of 6.5%. The bond matures in 10 years and has a current market pri

ce of $985. If the corporation sells more bonds it will incur flotation costs of $36 per bond. If the corporate tax rate is 34%, what is the after-tax cost of debt capital?a)5.71%b)5.45%c)5.18%d)4.78%
Business
1 answer:
Virty [35]1 year ago
3 0

Answer:After-tax cost of debt capital = 4.78%

Explanation:

Cost of debt (After-tax):

K_{d} = (\frac{1}{P_{b}} - F)\times(1 – tax rate)

Where,

K_{d}= After tax cost of debt

F = Floatation cost

P_{b} = Net proceeds

Net proceeds = Bond face value ± Premium or Discount

Net proceeds: $ 1000 - $ 15 = $ 985

Flotation cost = $ 36

Tax rate 34% or 0.34

Hence, after tax cost of debt =  (\frac{65}{985} - 36)\times(1 - 0.34)

= 4.778 % (approx.)

i.e. 4.78%

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