Corporate Finance Q90

90A company is considering issuing a 5-year option-free, 8 percent coupon bond, paid semi-annually. The bond is expected to sell at 98 percent of par value (USD1,000). If the company’s marginal tax rate is 35 percent, then the after-tax cost of debt is closest to:

Option : B
Explanation : Using the financial calculator, determine the yield.
N = 10, PV = -980, PMT = 80/2 = 40, FV = 1000, CPT I/Y = 4.25 semiannual Annual yield = 4.25 * 2 = 8.50 before tax
After-tax cost of debt: 8.50% (1 – 35%) = 5.525 ~ 5.53%.

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