Before-tax cost of debt and after-tax cost of debt Personal Finance Problem Davi

Question

Before-tax cost of debt and after-tax cost of debt Personal Finance Problem David Abbot is interested in purchasing a bond issued by Sony. He has obtained the following information on the security: Answer the following questions: Calculate the before-tax cost of the Sony bond using the bond's yield to maturity (YTM). Calculate the after-tax cost of the Sony bond given the corporate tax rate. The before-tax cost of the Sony bond using the bond's yield to maturity (YTM) is %. (Round to two decimal places.)

Explanation / Answer

price = coupon payment * PVIFA(r%,n) + par value * PVIF(r%,n)

930 = 80 * PVIFA(r%,10) + 1000 * PVIF(r%,10)

before tax cost of bond r = 9.10%

aftertax cost of debt = 9.10 * (1-0.25) = 6.83%

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