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Eile Edit View History Bookmarks Iools Help Cengage Brain My Home x Aplia: Student Question x CChegg Study I Guided solu... x Search Graded Assignment I Read Chapter 10 l Back to Assignment Due Sunday 04.17.16 at 11:30 PM Average: 13 Attempts: 3. Cost of debt Aa Aa E To find the after-tax cost of debt, multiply the before-tax cost of debt by Ferro Co. can borrow at an interest rate of 11.1% for a period of five years. Its marginal federal-plus-state tax rate is 30%. What is Ferro's after-tax cost of debt? Ferro Co. has outstanding 5-year noncallable bonds with a face value of $1,000. These bonds have a current market price of $1,438.04, a coupon rate of 14%, and annual coupon payments. The company faces a tax rate of 30%. If the company wants to issue new debt, what would be a reasonable estimate for its after-tax cost of debt? O 3.32% O 2.31% 2.60% O 2.89% Flash Player WIN 21,0,0,213 Q3 3.34.1 2004-2016 Aplia. All rights reserved Grade It Now Save & Continue O 2013 Cengage Learning except as noted. All rights reserved Suggestions Session 58:57 Timeout 5:49 PM

Explanation / Answer

a) (1-Tax rate)

b) After tax cost of debt = 11.1 (1- .30) = 7.77%

c)Yield =[Interest+(Face value -price)/years]/[(Fcae value +price)/2]

         = [140 + (1000-1438.04)/5 ]/[(1000+1438.05)/2]

           = [140 - 87.608] / [2438.05/2]

          = 52.392/ 1219.025

           = .0430 or 4.30%

After tax cost = 4.30 (1-.30 ) = 3.01%

correct option is A"    [close to 3.32%]

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