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19 July, 14:51

Rockingham Motors issued a 30-year, 8 percent semiannual bond 3 years ago. The bond currently sells for 103.1 percent of its face value. The company's tax rate is 34 percent. What is the aftertax cost of debt?

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  1. 19 July, 18:33
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    5.10%

    Explanation

    Since coupons are paid semi-annually, adjust the time and coupon payment amount to semiannual basis.

    Face value of the bond; FV = 1,000

    Maturity of the bond; N = 30*2 = 60

    Price of the bond; PV = - (1.031 * 1000) = - 1,031

    Semi-annual coupon payment; PMT = (8%/2) * 1,000 = 40

    Then compute semiannual interest rate; CPT I/Y = 3.866%

    Next, convert the 3.866% to annual rate (YTM) = 3.866% * 2 = 7.732%

    Therefore, pretax cost of debt is 7.732%

    Aftertax cost of debt = pretax cost of debt (1-tax)

    = 0.07732 (1-0.34)

    = 0.0510 or 5.10%
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Home » Business » Rockingham Motors issued a 30-year, 8 percent semiannual bond 3 years ago. The bond currently sells for 103.1 percent of its face value. The company's tax rate is 34 percent. What is the aftertax cost of debt?
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