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Suppose your firm just issued a 20-year, $1000 par value bond with semiannual coupons. The coupon interest rate is 9%. The bonds sold for par value, but flotation costs amounted to 5% of the price. You have a 21% corporate tax rate. What is your firm’s after-tax cost of debt? Group of answer choices

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Answer:

4.78%

Explanation:

From the question given, we solve the issue

the calculation of he bond price is:

Price of bond = per value * (1- flotation cost)

$1000 *  (1- 0.05)

= $950

For the calculation of semi-annual coupon payments,

Semi -annual coupon payment  = Par value * Interest/2

$1000 * 0.09/2 = $45

Calculation of semi- annual yield to maturity

Let recall the following

YTM = yield to maturity

C = The semi-annual coupon payment

FV= Face value or par value

PV= Price of a bond

n = Maturity years of the bond

Therefore,

YTM= C + FV - PV/n/ FV + PV/2

which is

$45 + $1000 - $950/40/$1000 + $950 / 2 = 4.78%

The firm’s after-tax cost of debt is $45 + $1000 - $950/40/$1000 + $950 / 2 is semi- annual yield to maturity is = 4.78%

What is the Tax cost?

From the question given, we solve the issue

Then the calculation of the bond price is:

Price of bond is = per value * (1- flotation cost)

$1000 * (1- 0.05)

Therefore, = $950

For the calculation of semi-annual coupon payments,

Then Semi -annual coupon payment is = Par value * Interest/2

$1000 * 0.09/2 = $45

Computation of semi- annual yield to maturity

Let recall the following are:

Then YTM is = yield to maturity

After that C is = The semi-annual coupon payment

Then FV is = Face value or par value

Now, PV is = Price of a bond

n is = Maturity years of the bond

Thus,

YTM is = C + FV - PV/n/ FV + PV/2

which is $45 + $1000 - $950/40/$1000 + $950 / 2 is = 4.78%

Find more information about Tax cost here:

https://brainly.com/question/26410519

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