Pluega Inc. issued a $100 million 8.27% coupon debenture bond due in the next 20 years. The bonds each sold for $996. If the bonds pay interest semi-annually, what is Pluega's after cash cost of debt? Assume 40% tax rate.

Question

Quizplus · Accepted Answer

First, we need to calculate the semi-annual coupon payment:

Coupon payment = (8.27% / 2) * $100 million = $4,135,000

Next, we need to calculate the semi-annual interest expense:

Interest expense = ($996 * ($100 million / $1,000)) - $4,135,000 = $3,850,200

Pluega's annual interest expense = 2 * $3,850,200 = $7,700,400

After-tax cost of debt = ($7,700,400 * (1 - 0.40)) / $100 million = 3.85%

Since we have calculated the semi-annual interest expense, we need to double it to get the annual interest expense. After calculating the after-tax cost of debt, we select the answer choice that matches the closest. The closest answer choice is C, which is 4.99%.