ABC Inc. issued twelve-year, 12 percent semi-annual coupon bonds at par. Today,
ID: 2699940 • Letter: A
Question
ABC Inc. issued twelve-year, 12 percent semi-annual coupon bonds at par. Today, the bonds are priced at $980. What is the firm%u2019s after-tax cost of debt if the tax rate is 35%? ABC Inc. issued twelve-year, 12 percent semi-annual coupon bonds at par. Today, the bonds are priced at $980. What is the firm%u2019s after-tax cost of debt if the tax rate is 35%? ABC Inc. issued twelve-year, 12 percent semi-annual coupon bonds at par. Today, the bonds are priced at $980. What is the firm%u2019s after-tax cost of debt if the tax rate is 35%? ABC Inc. issued twelve-year, 12 percent semi-annual coupon bonds at par. Today, the bonds are priced at $980. What is the firm%u2019s after-tax cost of debt if the tax rate is 35%? ABC Inc. issued twelve-year, 12 percent semi-annual coupon bonds at par. Today, the bonds are priced at $980. What is the firm%u2019s after-tax cost of debt if the tax rate is 35%? ABC Inc. issued twelve-year, 12 percent semi-annual coupon bonds at par. Today, the bonds are priced at $980. What is the firm%u2019s after-tax cost of debt if the tax rate is 35%?Explanation / Answer
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980 = 120/(1+r/2) + 120/(1+r/2)^2 +.......120/(1+r/2)^24 + 1000/(1+r/2)^24
(1+r/2) = 1.122
r/2 = 12.2 %
r = 24.4%
after tax cost = 0.65*24.4 % = 15.86 %