Answer:
after-tax cost of debt 5.2725%
Explanation:
We will solve for the market rate of the bonds which is the one that makes the maturity and coupon payment equal to its current market price:
We sovle it using a financial calcualtor or excel goal seek tool
[tex]C \times \frac{1-(1+r)^{-time} }{rate} = PV\\[/tex]
C 110.000 (1,000 x 11%)
time 10 years
rate 0.070304812
[tex]110 \times \frac{1-(1+0.0703048118151927)^{-10} }{0.0703048118151927} = PV\\[/tex]
PV $771.5066
[tex]\frac{Maturity}{(1 + rate)^{time} } = PV[/tex]
Maturity 1,000
time 10 years
rate 0.070304812
[tex]\frac{1000}{(1 + 0.0703048118151927)^{10} } = PV[/tex]
PV 506.90
PV c $771.5066
PV m $506.9034
Total $1,278.4100
Now that we find that market rate is 7.03%
we calcautle the after tax cost of debt:
7.03 x (1 - 25%) = 5.2725%
