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12 November, 05:53

Suppose your firm just issued a 20-year, $1000 par value bond with semiannual coupons. The coupon interest rate is 9%. The bonds sold for par value, but flotation costs amounted to 5% of the price. You have a 21% corporate tax rate. What is your firm's after-tax cost of debt? Group of answer choices

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  1. 12 November, 06:19
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    4.78%

    Explanation:

    From the question given, we solve the issue

    the calculation of he bond price is:

    Price of bond = per value * (1 - flotation cost)

    $1000 * (1 - 0.05)

    = $950

    For the calculation of semi-annual coupon payments,

    Semi - annual coupon payment = Par value * Interest/2

    $1000 * 0.09/2 = $45

    Calculation of semi - annual yield to maturity

    Let recall the following

    YTM = yield to maturity

    C = The semi-annual coupon payment

    FV = Face value or par value

    PV = Price of a bond

    n = Maturity years of the bond

    Therefore,

    YTM = C + FV - PV/n / FV + PV/2

    which is

    $45 + $1000 - $950/40/$1000 + $950 / 2 = 4.78%
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Home » Business » Suppose your firm just issued a 20-year, $1000 par value bond with semiannual coupons. The coupon interest rate is 9%. The bonds sold for par value, but flotation costs amounted to 5% of the price. You have a 21% corporate tax rate.
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