Corporate Finance

Posts: 9
Joined: Sat Jun 07, 2014 7:14 am

Corporate Finance

Postby neha.kapoor318 » Mon Aug 11, 2014 4:54 am

Dot com has determined that it could issue $1000face value bonds with an 8 percent coupon paid semi annually and a five year maturity at $900 per bond. If Dot com's marginal tax rate is 38%, it's after tax cost of debt is closest to : A) 6.2 % B) 6.4% C)6.6%? Can u please tell me how to calulate this and also i am don't know how to do calculation using Financial calculator i am using BA II plus Texas Instrument?

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Corporate Finance

Postby edupristine » Mon Aug 11, 2014 10:33 am

Put the values in Calculator:-
PV= -900, N = 10, PMT= 40, FV= 1000, I/Y=?
I/Y= 5.3149%
Multiply by 2(Compounded Semi - annually)= 5.3149%*2 = 10.6298%
Now we can calculate after tax cost of debt:-
10.6298%(1-38%) = 6.5905%
So, we can conclude the correct answer is C.

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