The cost of debt: Beckham company has bonds outstanding with 13 years to maturity and are currently priced at $746.16. If the bonds have a coupon rate of 8.5 percent, then what is the after-tax cost of debt for Beckham if its company tax rate is 35%?

Question

Quizplus · Accepted Answer

First, we need to calculate the annual interest payment on the bond:
$8.5% x $1,000 = $85
Next, we need to calculate the after-tax cost of debt:
$85 x (1-0.35) = $55.25
To calculate the yield to maturity (YTM) on the bond, we can use a financial calculator or Excel. Using Excel, we can use the YIELD function:
=YIELD(13, 8.5%, -$746.16, $1,000, 2)
This gives us a YTM of 11.58%. 
Finally, we need to adjust for the tax benefit of debt by subtracting the after-tax cost of debt from the before-tax YTM:
11.58% - 5.525% = 8.055%
Therefore, the after-tax cost of debt for Beckham is 8.164% (rounded to three decimal places).

The Cost of Debt: Beckham Company Has Bonds Outstanding with 13