Homework SourseGalvatron Metals has a bond outstanding with a coupon rate o
Galvatron Metals has a bond outstanding with a coupon rate of 6.2 percent and semiannual payments. the company\'s tax rate is 35 percent. What is the company\'s aftertax cost of debt? The bond currenty sells for $948 and matures in 24 years. The par value is $1000 and 431% o 310% o 398% 0 3.32% 4.57%
Solution
4.31%
Working:
| As per approximation method, | |||||||||||
| a. | Semi annual coupon | = | $ 1,000 | x | 6.2% x 6/12 | ||||||
| = | $ 31 | ||||||||||
| b. | Before tax cost of debt | = | (Coupon+(Par Value-Current Price)/semi annual period)/((Par Value + Current Price)/2) | ||||||||
| (Semi annual) | = | (31+(1000-948)/48)/((1000+948)/2) | |||||||||
| = | 3.29% | ||||||||||
| c. | |||||||||||
| Before tax cost of debt | = | 3.29% | x | 2 | |||||||
| (Annual) | = | 6.59% | |||||||||
| d. | after tax cost of debt | = | Before tax cost of debt *(1-Tax rate) | ||||||||
| = | 6.59% | x | (1-0.35) | ||||||||
| = | 4.28% | ||||||||||
| As per Exact method, | |||||||||||
| Nper | (Number of periods) | 48 | |||||||||
| pmt | (semi annual payment) | $ 31 | |||||||||
| PV | (Current Price) | $ 948 | |||||||||
| FV | (Face Value) | $ 1,000 | |||||||||
| Before tax yield to maturity | = | =rate(nper,pmt,-pv,fv)*2 | |||||||||
| = | =rate(48,31,-948,1000)*2 | ||||||||||
| = | 6.6361% | ||||||||||
| After tax Yield to maturity | = | 6.6361%*(1-0.35) | |||||||||
| = | 4.31% | ||||||||||
