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Gala Corp. wants to determine its cost of debt. The firm has o utstanding debt with...

Gala Corp. wants to determine its cost of debt. The firm has o

utstanding debt with 18

years to maturity that is quoted at 107% of its face value (the face value is $100 and the

price is $107). The issue makes annual payments and has a coupon rate of 6%. The tax

rate faced by the firm is 35%. Compute the firm’s after

-tax cost of debt.

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Answer #1
Pr value of bond 100
Issue price of bond 107
Annual Interestt 6
Annuity PVF for 18yrs at 5.35% 11.37642
PVf for 18th yr at 5.35% 0.391363
Present Value of interest 68.25852
Present value of maturity value 39.1363
Price of Bonds 107.3948
Cost of debt before tax = 5.35%
After tax cost of debt = 5.35% (1-0.35) = 3.48%
Answer is 3.48%
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