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lichtenfeld has a bond issue outstanding that matures in 19 years. the bonds pay interest semiannually. the bonds have a face value of $1,000 and are currently priced at $995.28. the bonds carry a coupon rate of 3.5 percent. what is the aftertax cost of debt if the total tax rate is 22 percent?

Respuesta :

The aftertax cost of debt if the total tax rate is 22 percent is 2.76%

How to calculate the the aftertax cost of debt if the total tax rate is 22 percent?

The following information can be deduced:

Semi annual coupon will be:

= 1000 × (3.5/2)%

= $17.5

Putting into a financial calculator;

N = (19 × 2) = 38

PV = -995.28

PMT = 17.5

FV = 1000

Solving for I/Y; we get I/Y = 1.767%

Hence since these are semi annual; yield to maturity will be:

= 1.767× 2

= 3.534%

After tax cost of debt = YTM × (1 - tax rate)

= 3.534 × (1 - 0.22)

= 2.76%

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