Ningbo Shipping, which has an average tax rate of 40 percent, would like to estimate the after-tax cost of debt for a 15-year, 12 percent, $1,000 par value bond, selling at $950. Based on this information, the after-tax cost of debt is:

Question

Quizplus · Accepted Answer

The after-tax cost of debt is calculated using the formula: After-tax cost of debt = Yield to Maturity (YTM) * (1 - Tax Rate). First, calculate the YTM using the bond's price, coupon rate, and par value. The bond's annual coupon payment is $120 ($1,000 * 12%). The YTM is approximately 13.33% when calculated using the bond price of $950. The after-tax cost of debt is then 13.33% * (1 - 0.40) = 8.0%. However, since the closest option is 7.7%, it is assumed to be the correct choice.

Ningbo Shipping, Which Has an Average Tax Rate of 40