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The Pet Market has $1,000 face value bonds outstanding with 21 years to maturity, a coupon rate of 6.4 percent, annual interest payments, and a current price of $892. What is the aftertax cost of debt if the combined tax rate is 21 percent?

Respuesta :

Answer:

5.87%

Explanation:

In order to find out the after tax cost of debt first we have to determine the rate after applying the rate formula which is shown below:

Given that,  

Present value = $892

Future value or Face value = $1,000  

PMT = 1,000 × 6.4%  = $64

NPER = 21 years

The formula is shown below:  

= Rate(NPER;PMT;-PV;FV;type)  

The present value come in negative  

So, after solving this,  

1. The pretax cost of debt is 7.43%

2. And, the after tax cost of debt would be

= Pretax cost of debt × ( 1 - tax rate)

= 7.43% × ( 1 - 0.21)

= 5.87%

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