Micro Spinoffs Inc. issued 10-year debt a year ago at par value with a coupon ra
ID: 2759245 • Letter: M
Question
Micro Spinoffs Inc. issued 10-year debt a year ago at par value with a coupon rate of 6%, paid annually. Today, the debt is selling at $1,060. If the firm’s tax bracket is 30%, what is its percentage after-tax cost of debt? Assume a face value of $1,000.
Micro Spinoffs Inc. issued 10-year debt a year ago at par value with a coupon rate of 6%, paid annually. Today, the debt is selling at $1,060. If the firm’s tax bracket is 30%, what is its percentage after-tax cost of debt? Assume a face value of $1,000.
Explanation / Answer
Years remainin to maturity = 10 -1 = 9 years
YTM =[interest +(Face value -price)/Years]/[(Face value +price)/2]
= [60+ (1000 -1060)/9] /[(1000+1060)/2]
= [60 + (-60/9) ] /[2060/2]
= [ 60 - 6.67] / 1030
= 53.33 / 1030
= .0518 or 5.18%
After tax cost of debt = 5.18 (1 - .30 ) = 5.18* .70 = 3.62%