A firm issues a 10-year debt obligation that bears a 8% coupon rate and gives th

Question

A firm issues a 10-year debt obligation that bears a 8% coupon rate and gives the investor the right to put the bond back to the issuer at the end of the fifth year at 103% of its face amount. The issue has no sinking fund. Interest is paid semiannually.
The issuer’s tax rate is 40%.
Calculate the after-tax cost of debt, assuming investors put the bond back to the firm at the end of the fifth year. (Note: Any unamortized issuance expenses and any redemption premium can be deducted for tax purposes in the year of redemption.)

Explanation / Answer

here tax bracket is 40% and interest paid semi annually (ignore it) After tax cost of bond = (1-tax rate)*copon rate(incase of bonds only)  (1-0.4)*0.08 =4.8%    

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.