Micro Spinoffs, Inc., issued 10-year debt a year ago at par value with a coupon
ID: 2749970 • Letter: M
Question
Micro Spinoffs, Inc., issued 10-year debt a year ago at par value with a coupon rate of 7%, paid annually. Today, the debt is selling at $1,110. If the firm’s tax bracket is 35%, what is its after-tax cost of debt? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Micro Spinoffs, Inc., issued 10-year debt a year ago at par value with a coupon rate of 7%, paid annually. Today, the debt is selling at $1,110. If the firm’s tax bracket is 35%, what is its after-tax cost of debt? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Explanation / Answer
Calculation of Yield to Maturity:
YTM: Bond Price = Par Value x Coupon Rate x 1 - (1 + r)^-mxn / r + Par Value / (1 + r)^mxn
Par Value = 1,000 Coupon Rate = 7%, m = Coupon payment per year = 1, n = Number of Years = 9, Bond Price = 1,110
YTM: 1,110 = 1,000 x 0.07 x 1 - (1+0.07)^-1x9 / r + 1,000 / (1 + r)^1x9
r = 5.42%
Yield To Maturity = 5.42% (This is before tax cost of debt)
After Tax cost of Debt= 5.42 x (1 - 0.35) = 3.52%