A. The _________ is the interest rate that a firm pays on any new debt financing

Question

A. The _________ is the interest rate that a firm pays on any new debt financing. B. Galbraith Co. can borrow at an interest rate of 9.7% for a period of four years. Its marginal federal-plus-state tax rate is 35%. What is Galbraith's after-tax cost of debt? C. Calbraith Co. has outstanding 5-year noncallable bonds with a face value of $1000. These bonds have a current market price of $1,050.76, a coupon rate of 10%, and annual coupon payments. The company faces a tax rate of 35%. If the company wants to issue new debt, what would be a reasonable estimate for its after-tax cost of debt?

Explanation / Answer

The ___Coupon______ is the interest rate that a firm pays on any new debt financing

B. The after tax cost of debt = pre tax cost *(1-tax rate) = 9.7*(1-0.35) = 6.305%

C. The pretax cost of debt is calculated as the YTM

The YTM is calculated as =rate(nper,pmt,pv,fv) in excel where nper = 5, pmt =10% of 1000 = 100, PV = 1050.76 and FV =1000

The pretax cost of debt =rate(5,100,-1050.76,1000) = 8.705%

The after tax cost of debt = 8.705*(1-0.35) = 5.65825% = 5.66% (Rounded)

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