Question

Mojo Mining has a bond outstanding that sells for $1,067 and matures in 23 years. The bond pays semiannual coupons and has a coupon rate of 6.26 percent. The par value is $1,000. If the company's tax rate is 35 percent, what is the aftertax cost of debt?

Answer 1

Bond Par Value = $1,000

Bond Value = $1,067

Time Period = 23 years

Coupon Rate = 6.26% semi-annually

Calculating Yield to Maturity,

Using TVM Calculation,

I = [FV = 1,000, PV = 1,067, PMT = 31.30, T = 46]

I = 5.73%

After-tax cost of debt = (1 - 0.35)(0.0573)

After-tax cost of debt = 3.72%