Walker & Son is issuing a 10-year, $1,000 par value bond that pays 9% interest annually. The bond is expected to sell for $885. What is Walker & Son's after-tax cost of debt if the firm is in the 34% tax bracket?

Question

Quizplus · Accepted Answer

The after-tax cost of debt can be calculated using the formula: After-tax cost of debt = (Annual interest payment + (Par value - Issue price) / Years to maturity) / (Issue price + Par value) / 2 * (1 - Tax rate). Plugging in the values: After-tax cost of debt = ($90 + ($1,000 - $885) / 10) / (($885 + $1,000) / 2) * (1 - 0.34) = 7.23%.

Walker & Son Is Issuing a 10-Year, $1,000 Par Value