Question

Boulder Furniture has bonds outstanding that mature in 13 years, have a 6 percent coupon, and pay interest annually. These bonds have a face value of $1,000 and a current market price of $1,040. What is the company's after tax cost of debt if its tax rate is 32 percent? 2.97 percent 3.24 percent 3.78 percent O 5.56 percent 5.53 percent

Answer 1

Answer: 3.78 percent

For after tax cost of debt, we first need to determine the ytm or yield to maturity of the bond

Face value=1000
Present value=1040
Coupon rate=6%
Coupon payment=(Coupon rate)*(Face value)=6%*1000=60
Time period=13

Q 1 Face value 1000 2 Present value -1040 3 Coupon payment 4 Time period 5 Yield to maturity= 60 13 5.56% Formula used: RATE(R4,R3,R2,R1) 6

So, yield to maturity=5.56%
Tax rate =32%
After tax cost of debt=5.56%*(1-32%)=3.78%