Apple's 9% annual coupon bond has 10 years until maturity and the bonds are selling in the market for $1190. If the firm's after-tax cost of debt is 5%, what was the firm's tax rate?

Question

Quizplus · Accepted Answer

The first step is to determine the annual interest payment on the bond. This is calculated as 9% of the face value, which is $90 ($1000 x 0.09).

Next, we need to calculate the yield to maturity (YTM) on the bond. We know that the bond is currently selling for $1190, which is a premium to its face value of $1000. Therefore, the YTM is lower than the coupon rate of 9%. Using a financial calculator or Excel, the YTM can be calculated as approximately 6.8%.

Now we can use the after-tax cost of debt formula:

After-tax cost of debt = YTM x (1 - tax rate)

Plugging in the values we know:

0.05 = 0.068 x (1 - tax rate)

Solving for the tax rate:

Tax rate = 0.2151 or 21.51%

Therefore, the answer is choice A.

Apple's 9% Annual Coupon Bond Has 10 Years Until Maturity