You know that the after-tax cost of debt capital for Bubbles Champagne is 6.30 p
ID: 2804882 • Letter: Y
Question
You know that the after-tax cost of debt capital for Bubbles Champagne is 6.30 percent. Assume that the firm has only one issue of five-year bonds outstanding. The bonds make semiannual coupon payments and the marginal tax rate is 30 percent.
Calculate Pre-tax cost of debt capital. (Round intermediate calculations to 4 decimal places, e.g. 1.2514 and final answer to 2 decimal places, e.g. 15.25%.)
What is the current price of the bonds if the coupon rate on those bonds is 9.00 percent?
Explanation / Answer
Answer) After tax cost of debt = Before tax cost of debt * (1-tax rate)
6.30% / (1-0.30) = 9%= Pre tax cost of debt
Answer 2)
Since the coupon rate and the pretax cost of debt is 9% the bond is know to be trading at par hence the current price of bond is also 1000 if the par value of bond is 1000.