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Galvatron Metals has a bond outstanding with a coupon rate of 6.7 percent and semiannual payments. The bond currently sells for $1,863 and matures in 21 years. The par value is $2,000 and the company's tax rate is 40 percent. What is the company's aftertax cost of debt?

Respuesta :

Answer:

4.40%

Explanation:

In this question, we use the Rate formula which is shown in the spreadsheet.  

The NPER represents the time period.  

Given that,  

Present value = $1,863

Future value or Face value = $2,000  

PMT = 2,000 × 6.7% ÷ 2 = $67

NPER = 21 years × 2 = 42 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 7.34%

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

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

= 7.34% × ( 1 - 0.40)

= 4.40%

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