Turner Cement Products has a bond issue outstanding that matures in 12 years. The bonds pay interest semi-annually. Currently, the bonds are quoted at 102.5 percent of face value and carry an
8)5 percent coupon. The ﬁrm's tax rate is 35 percent. What is Turner's after-tax cost of debt?

Question

Quizplus · Accepted Answer

The after-tax cost of debt can be calculated as follows:

1. Calculate the pre-tax cost of debt:

Coupon rate = 8.5% 
Market price = 102.5% of face value 
Face value = $1,000 
Therefore, the annual coupon payment is $85 (=$1,000 x 8.5%).

The current yield on the bond can be calculated as:

Current yield = Annual coupon payment / Market price 
= $85 / ($1,000 x 1.025) 
= 8.29%

Therefore, the pre-tax cost of debt is 8.29%.

2. Calculate the after-tax cost of debt:

After-tax cost of debt = Pre-tax cost of debt x (1 - Tax rate) 
= 8.29% x (1 - 0.35) 
= 5.38%

Therefore, the after-tax cost of debt for Turner Cement Products is 5.31% (rounded to two decimal places).

Turner Cement Products Has a Bond Issue Outstanding That Matures