Galvatron Metals has a bond outstanding with a coupon rate of 6.6 percent and...
Galvatron Metals has a bond outstanding with a coupon rate of 6.6 percent and semiannual payments. The bond currently sells for $1,856 and matures in 22 years. The par value is $2,000 and the company's tax rate is 39 percent. What is the company's aftertax cost of debt?static/image/hrline/2.gif
Information provided:Par value= future value= $2,000Current price= present value= $1,856Time= 22 years*2= 44 semi-annual periodsCoupon rate= 6.6%/2= 3.3%Coupon payment= 0.033*2,000= $66Tax rate= 39%The question is solved by first calculating the before tax cost of debt.The yield to maturity is computed to derive the before tax cost of debt.Enter the below in a financial calculator to compute the yield to maturity:FV= 2,000PV= -1,856N= 44PMT= 66Press the CPT key and I/Y to compute the yield to maturity.The value obtained is 3.6301.Therefore, the before tax cost of debt is 3.6301*2=7.2602%After tax cost of debt= before tax cost of debt*(1- tax rate) = 7.2602% *(1- 0.39) = 4.4287%https://latex.codecogs.com/gif.latex?%5Crightarrow 4.43%.In case of any query, kindly comment on the solution.
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