S.Claus & Company is planning a zero coupon bond issue.The bond has a par value of R1,000, matures in 2 years, and will be sold at a price of R826.45.The firm's marginal tax rate is 40 percent.What is the annual after-tax cost of debt to the company on this issue?

Question

Quizplus · Accepted Answer

First, we need to calculate the yield to maturity (YTM) to determine the nominal rate of the bond. We can do this by using the following formula:

P = F/(1+r)^n

Where:
P = price of the bond
F = face value of the bond
r = YTM
n = number of periods

Substituting the given values, we get:

826.45 = 1000/(1+r)^2

Solving for r, we get:

r = 6.00%

Next, we need to calculate the after-tax cost of debt using the following formula:

ATCD = YTM x (1 - tax rate)

Substituting the given values, we get:

ATCD = 6.00% x (1 - 0.40)

ATCD = 3.60%

Therefore, the annual after-tax cost of debt to the company on this issue is 3.60%. The closest answer choice is B) 6.0%, but this is not the correct answer.

SClaus & Company Is Planning a Zero Coupon Bond Issue