Micro Spinoffs Inc. issued 10-year debt a year ago at par value with a coupon ra

Question

Micro Spinoffs Inc. issued 10-year debt a year ago at par value with a coupon rate of 5%, paid annually. Today, the debt is selling at $1,210. If the firm’s tax bracket is 20%, what is its percentage after-tax cost of debt? Assume a face value of $1,000. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Micro Spinoffs Inc. issued 10-year debt a year ago at par value with a coupon rate of 5%, paid annually. Today, the debt is selling at $1,210. If the firm’s tax bracket is 20%, what is its percentage after-tax cost of debt? Assume a face value of $1,000. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Explanation / Answer

Before Tax Cost of Debt = rate(nper,pmt,pv,fv)

Nper (indicates the period) = (10-1) =9

PV (indicates the price) = 1210

PMT (indicate the annual payment) = 1000*5% = 50

FV (indicates the face value) = 1000

Rate (indicates YTM) = ?

Before Tax Cost of Debt = rate(9,50,-1210,1000)

Before Tax Cost of Debt = 2.38 %

After Tax Cost of Debt = Before Tax Cost of Debt *(1-tax rate)

After Tax Cost of Debt = 2.38*(1-20%)

After Tax Cost of Debt = 1.90%

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