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ale4655
1 month ago
5

A company has outstanding 20-year noncallable bonds with a face value of $1000, and 11% annual coupon, and a market price of $1,

294.54. if the company was to issue new debt, what would be a reasonable estimate of the interest rate on the debt? If the company’s tax rate is 40%, what Is its after-ax cost of debt?

Business
1 answer:
Katen [3.5K]1 month ago
6 0
The annual pretax cost of debt is 8%, while the after-tax cost amounts to 4.8%. By applying the rate formula, we analyze the NPER over 20 years with a present value of $1,294.54 and a future value of $1,000. The PMT computed is $110 from the 11% coupon. Subsequently, the after-tax cost of debt is calculated as: 8% × (1 - 0.40) = 4.8%.
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