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A firm recently issued $1,000 par value, 15-year bonds with a coupon rate of 9%. Coupon interest payments will be paid semi-annually. The bonds sold at par value, but the firm paid flotation costs amounting to 5% of par value. The firm has a corporate tax rate of 21%. What is the firm's after-tax cost of debt for these bonds?

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ayokenny2001

Answer:

The firm's after cost of debt is 7.48%

Explanation:

Floatation cost increases the cost because a diminished portion of the whole amount was received.

Given that;

r = 9%

t = 21%

f = 5%

After tax cost of debt = r ( 1 - t ) / ( 1 - f )

0.09 ( 1 - 0.21 ) / 1 - 0.05 )

= 0.0711 / 0.95

=0.0748421053

= 7.48%

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