Question

(Cost of debt) Temple-Midland, Inc. is issuing a $1,000 par value bond that pays 8.5 percent annual interest and matures in 15 years. Investors are willing to pay $952 for the bond and Temple faces a tax rate of 32 percent. What is Temple's after-tax cost of debt on the bond? The after-tax cost of debt is %. (Round to two decimal places.) Enter your answer in the answer box and then click Check Answer. All mortech javascriptdoExercise (7): Clear All Check Answer

Answer 1

To find the cost of debt, we need to put the following values in the financial calculator:

N = 15;

PV = -952;

PMT = 8.5%*1000 = 85;

FV = 1000;

Press CPT, then I/Y, which gives us 9.10

So, Before-tax cost of debt = 9.10%

After-tax cost of debt = Before-tax cost of debt * (1 - t) = 9.10% * (1 - 0.32) = 6.19%