You know that the aftertax cost of debt capital for Bubbles

You know that the after-tax cost of debt capital for Bubbles Champagne is 8.40 percent. Assume that the firm has only one issue of five-year bonds outstanding. The bonds make semiannual coupon payments and the marginal tax rate is 30 percent.

You know that the after-tax cost of debt capital for Bubbles Champagne is 8.40 percent. Assume that the firm has only one issue of five-year bonds outstanding. The bonds make semiannual coupon payments and the marginal tax rate is 30 percent.

Solution

To find the price of the bond we need to use the PV function in excel

We need four parameters, rate, pmt, nper and fv

rate = YTM = before tax cost of debt = After tax cost/(1-tax rate) = 8.4/(1-0.3) = 8.4/0.7 = 12% = 0.12

coupon rate = 12% of 1000 = 120

nper = 5 years,

FV =1000

However, since the Yield to maturity = Coupon rate = 12%, the price of the bond will be equal to the face value

Current price of the bond = $1,000