Great Seneca Inc sells 100 million worth of 19year to maturi

Great Seneca Inc. sells $100 million worth of 19-year to maturity 9.56% annual coupon bonds. The net proceeds (proceeds after flotation costs) are $995 for each $1,000 bond. The firm\'s marginal tax rate is 35%. What is the after-tax cost of capital for this debt financing?

Solution

Face Value per bond = $1,000
Current Price per bond = $995

Annual Coupon = 9.56% * $1,000
Annual Coupon = $95.60

Time to Maturity = 19 years

Let annual YTM be i%

$995 = $95.60 * PVIFA(i%, 19) + $1,000 * PVIF(i%, 19)

Using financial calculator:
N = 19
PV = -995
PMT = 95.60
FV = 1000

I/Y = 9.618%

Pretax Cost of Debt = 9.618%
After-tax Cost of Debt = 9.618% * (1 - 0.35)
After-tax Cost of Debt = 6.25%