finance
company issuing $1,000 par value bond that pays 7% annual interest maturing in 15 yrs. Investors willing to pay $958 for bond. Flotation cost 11% of market value and tax rate 18%. What will be theafter-tax cost of debt?
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The after-tax cost of debt is 6.20%. This is calculated by subtracting the tax rate from the after-tax yield of the bond. The after-tax yield is calculated by subtracting the flotation costs from the pre-tax yield. In this case, the pre-tax yield is 7%, and the flotation cost is 11% of the market value, which is $958. This amounts to $105.38, which brings the after-tax yield down to 6.95%. Subtracting the 18% tax rate from this yield gives us the after-tax cost of debt of 6.20%.
