Corporate Finance

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Joined: Sat Nov 07, 2015 3:35 am

Corporate Finance

Postby ankita.rehani » Sun Jan 10, 2016 10:41 pm

A firm is determining the after tax cost of debt in its WACC calculation. It has recently issued a bond for $956 for 15 years with the semi-annual coupon payment of 10%. The bond has a face value of $1000. If the marginal tax is 35%, the after tax cost of debt will be?

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Re: Corporate Finance

Postby edupristine » Sat Jan 16, 2016 7:54 am

Cost of debt, can be calculated by two step approach:
1) We calculate annual yield to maturity for investor, which by
Equating Present value, i.e. 1000*97% with the semi-annual payments, we get annual yield maturity i.e. 10.592% (APR)
2) Now, from company’s point of view this cost shall be calculated considering the fact that they can deduct interest from taxable income.
Given the tax rate of 35%, we get , Cost of debt is given by, 10.592%*(1-.35)= 6.88%

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