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at the present time, perpetualcold refrigeration company (prc) has 15-year noncallable bonds with a face value of $1,000 that are outstanding. these bonds have a current market price of $1,136.50 per bond, carry a coupon rate of 12%, and distribute annual coupon payments. the company incurs a federal-plus-state tax rate of 25%. if prc wants to issue new debt, what would be a reasonable estimate for its after-tax cost of debt (rounded to two decimal places)? (note: round your ytm rate to two decimal place.)

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contexto1019

a) Data and Calculations for the Perpetual Cold Refrigerator:

Given,

Face value (15-year noncallable bonds outstanding) = $1,000 per bond

Current market price (per bond) = $1,329.55

The coupon rate of bonds = 12% p.a.

State tax rate = 35%

Cost of new debt = $1,000 * 12%

                             =$120 p.a.

After-tax cost of debt = $120 *(100% - 35%)

                                     = $120 * 65%

                                     = $78

Now, converting it into a percentage:  $78/$1,000 = 0.078

Since, after rounding off the answer is 0.08

b) The cost of  Perpetual Cold Refrigerator's (PRC's ) new debt is calculated at the rate at which the company agrees to pay its new debt. The major differentiated factor between the cost of debt and the after-tax cost of debt is called the deduction of interest expense.  

In PRC's capital structure decisions are taken by determining the cost of debt. The after-tax cost of debt is compared with the cost of equity and involves some financial computations.

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