Simple Foods has a zero coupon bond issue outstanding that matures in 9 years.The bonds are selling at 42 percent of par value.What is the company's aftertax cost of debt if the tax rate is 38 percent?

Question

Quizplus · Accepted Answer

The aftertax cost of debt can be calculated using the following formula:

Aftertax Cost of Debt = (YTM x (1 - Tax Rate))

Where YTM is the yield to maturity of the bond.

Since the bond is a zero coupon bond, we can use the following formula to calculate the YTM:

YTM = (Face Value/Price)^(1/n) - 1

Where Face Value is the par value of the bond, Price is the current price of the bond, and n is the number of years to maturity.

Substituting the given values, we get:

YTM = (100/42)^(1/9) - 1 = 0.1349 or 13.49%

Now, substituting this value and the given tax rate, we get:

Aftertax Cost of Debt = (13.49% x (1 - 0.38)) = 8.36%

Therefore, the answer is C) 6.12%.

Simple Foods Has a Zero Coupon Bond Issue Outstanding That