Beckham Corporation has semiannual bonds outstanding with 13 years to maturity and the bonds 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 marginal tax rate is 35%

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andromache andromache · Answer 1 · 2020-03-29T13:58:37+02:00

Answer:

8.125%

Explanation:

Given that,

Present value = $746.16

Assuming figure - Future value or Face value = $1,000

PMT = 1,000 × 8.5% ÷ 2 = $42.5

NPER = 13 years × 2 = 26 years

The formula is shown below:

= Rate(NPER;PMT;-PV;FV;type)

The present value come in negative

So, after solving this,

1. The pretax cost of debt is 6.25% × 2 = 12.50%

2. And, the after tax cost of debt would be

= Pretax cost of debt × ( 1 - tax rate)

= 12.50% × ( 1 - 0.35)

= 8.125%