Question

Sunland has determined that it could issue $1000 face value bonds with an 10 percent coupon paid semiannually and a 5-year maturity at $939.63 per bond. If Sunland’s marginal tax rate is 40 percent, its after-tax cost of debt is closest to:
A_6.6 percent.,B_7.0 percent., C_7.3 percent., D_6.7 percent.

Answer 1

K = Nx2

Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2

k=1

K =5x2

939.63 =∑ [(10*1000/200)/(1 + YTM/200)^k]     +   1000/(1 + YTM/200)^5x2

k=1

YTM% = 11.63

After tax rate = YTM * (1-Tax rate)

After tax rate = 11.63 * (1-0.4)

After tax rate = 6.98 = 7%