Galvatron Metals has a bond outstanding with a coupon rate of 6.7 percent and semiannual payments. The bond currently sells for
$1,863 and matures in 21 years. The par value is $2,000 and the company's tax rate is 40 percent. What is the company's aftertax cost of debt?
1 answer:
Answer:
4.40%
Explanation:
In this question, we use the Rate formula which is shown in the spreadsheet.
The NPER represents the time period.
Given that,
Present value = $1,863
Future value or Face value = $2,000
PMT = 2,000 × 6.7% ÷ 2 = $67
NPER = 21 years × 2 = 42 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 7.34%
2. And, the after tax cost of debt would be
= Pretax cost of debt × ( 1 - tax rate)
= 7.34% × ( 1 - 0.40)
= 4.40%
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