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Tangshan Mining is considering issuing long-term debt. The debt would have a 30 year maturity and a 6 percent coupon rate and make semiannual coupon payments. In order to sell the issue, the bonds must be underpriced at a discount of 1 percent of face value. In addition, the firm would have to pay flotation costs of 1 percent of face value. The firm's tax rate is 21 percent. Given this information, the after-tax cost of debt for Tangshan Mining would be ________.

Respuesta :

Answer:

After tax cost of debt is 4.85%

Explanation:

The starting to computing the after tax cost of debt is to calculate the yield to maturity on the bond .

The yield to maturity on the bond can be computed using the rate formula in excel.

=rate(nper,pmt,-pv,fv)

nper is the time to maturity of 30 years multiplied by 2 since the bond is paying interest on semi-annual basis

pmt is the semi-annual interest receivable by investor which 6.0%/2*$1000=$30

pv is the current market price :$1000*98% =$980 (100-2%),1% deducted for discount,1% for issue cost

fv is the face value of $1000

=rate(60,30,-980,1000)

rate=3.07%

The 3.07%  is the semi-annual YTM, whereas the annual YTM 3.07% *2=6.14%

After tax cost of debt=YTM*(1-0.21)

                                    =6.14%*(1-0.21)

                                   =4.85%

Tundexi

The After-Tax Cost of Debt for Tangshan Mining will be 4.86%.

Given Information

Face Value = $1,000

Bond Price = $980 [$1,000 * 98%]

Semi-annual Coupon Amount = $30 [$1,000 * 6% * ½]

Maturity Years = 60 Years [30 Years x 2]

  • The Formula for Yield to Maturity [YTM] is [Coupon Amount + [(Par Value – Bond Price) / Maturity Years] / [(Par Value + Bond Price)/2]]

Yield to Maturity [YTM] = [$30 + {($1,000 – $980) / 60 Years)] / [($1,000 + $980) / 2]

Yield to Maturity [YTM] = [($30 - $0.33) / $990]

Yield to Maturity [YTM] = 0.03075

Yield to Maturity [YTM] = 3.075%

 

Annual YTM of the Bond = 3.075% * 2

Annual YTM of the Bond = 6.15%

  • The Formula for After-Tax Cost of Debt is [Bonds Yield to maturity x (1 – Tax Rate)]

After-Tax Cost of Debt = 6.15% * (1 – 0.21)

After-Tax Cost of Debt = 6.15% * 0.79

After-Tax Cost of Debt = 4.86%

Therefore, the After-Tax Cost of Debt for Tangshan Mining will be 4.86%.

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