Raceway Motors issued a 20-year, 8 percent semiannual bond 3 years ago. The bond currently sells for 98.6 percent of its face value. The company's tax rate is 34 percent. What is the aftertax cost of debt?

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The aftertax cost of debt is the yield to maturity adjusted for the tax savings from the interest payments. The yield to maturity is the annual rate of return an investor would earn if they held the bond until maturity. The yield to maturity can be calculated using the following formula:YTM = (C + (FV - PV) / N) / ((FV + PV) / 2)where:C = the annual coupon paymentFV = the face value of the bondPV = the present value of the bondN = the number of years to maturityIn this case, the annual coupon payment is $80 (8% x $1,000), the face value of the bond is $1,000, the present value of the bond is $986 (98.6% x $1,000), and the number of years to maturity is 17 (20 - 3). Plugging these values into the formula, we get:YTM = (80 + (1,000 - 986) / 17) / ((1,000 + 986) / 2)= 5.69%The aftertax cost of debt is the yield to maturity adjusted for the tax savings from the interest payments. The tax savings from the interest payments is equal to the interest payments multiplied by the tax rate. In this case, the interest payments are $80, and the tax rate is 34%. Plugging these values into the formula, we get:Aftertax cost of debt = YTM - (YTM x Tax rate)= 5.69% - (5.69% x 34%)= 5.38%Therefore, the aftertax cost of debt is 5.38%.

Raceway Motors Issued a 20-Year, 8 Percent Semiannual Bond 3