A corporate bond has a face value of $1,000 and a coupon rate of 5%.The bond matures in 15 years and has a current market price of $925.If the corporation sells more bonds,it will incur flotation costs of $25 per bond.If the corporate tax rate is 35%,what is the after-tax cost of debt capital?

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The after-tax cost of debt capital is the yield to maturity (YTM) of the bond adjusted for the tax savings from the interest payments. The YTM is the annual rate of return that an investor would earn if they bought the bond at the current market price and held it until maturity. The YTM can be calculated using the following formula:YTM = (C + (FV - PV) / N) / ((FV + PV) / 2)where:C = annual coupon paymentFV = face value of the bondPV = present value of the bondN = number of years to maturityIn this case, the annual coupon payment is $50 (5% of $1,000), the face value of the bond is $1,000, the present value of the bond is $925, and the number of years to maturity is 15. Plugging these values into the formula, we get:YTM = (50 + (1000 - 925) / 15) / ((1000 + 925) / 2)= 6.78%The after-tax cost of debt capital is the YTM adjusted for the tax savings from the interest payments. The tax savings are equal to the interest payments multiplied by the corporate tax rate. In this case, the interest payments are $50 per year and the corporate tax rate is 35%. Therefore, the tax savings are $50 * 0.35 = $17.50 per year. The after-tax cost of debt capital is the YTM minus the tax savings, or 6.78% - 1.75% = 5.03%.

A Corporate Bond Has a Face Value of $1,000 and a Coupon