Boulder Furniture has bonds outstanding that mature in 13 ye

Boulder Furniture has bonds outstanding that mature in 13 years, have a 6 percent coupon, and pay interest semi - annually. These bonds have a face value of $1,000 and a current market price of $1,040. What is the company\'s aftertax cost of debt if its tax rate is 32 percent?

Solution

YTM of the bond is the before tax cost of debt

N = 13 *2 = 26 and Coupon = 3%, PV = -1040 and FV = 1000

YTM = 5.56%

After tax cost of debt = 5.56% * (1 - 0.32) = 3.78%