USA Manufacturing issued 30-year, 7.5 percent semiannual bonds 6 years ago.The bonds currently sell at 101 percent of face value.What is the firm's aftertax cost of debt if the tax rate is 35 percent?

Question

Quizplus · Accepted Answer

The aftertax cost of debt is the yield to maturity multiplied by (1 - tax rate). The yield to maturity is the annual interest payment divided by the bond price plus the annual change in the bond price. The annual interest payment is $75 (7.5% of $1,000) and the bond price is $1,010 (101% of $1,000). The annual change in the bond price is -$10 ($1,000 - $1,010). Therefore, the yield to maturity is 7.43% ($75 / $1,010 - $10). The aftertax cost of debt is 4.82% (7.43% * (1 - 35%)).

USA Manufacturing Issued 30-Year, 7