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Mojo Mining has a bond outstanding that sells for $1,055 and matures in 23 years. The bond pays semiannual coupons and has a coupon rate of 5.94 percent. The par value is $1,000. If the company's tax rate is 40 percent, what is the aftertax cost of debt?

Respuesta :

Answer: Therefore, the aftertax cost of debt for Mojo Mining's bond is approximately 0.015 or 1.5%.

Explanation:

Given values:

Coupon Rate = 5.94% or 0.0594

Par Value = $1,000

Number of Coupon Payments per Year = 2 (semiannual payments)

Number of Years to Maturity = 23

Current Price = $1,055

Tax Rate = 40%

Calculate Coupon Payment:

Formula: Coupon Payment = (Coupon Rate * Par Value) / Number of Coupon Payments per Year

Calculate Aftertax Cost of Debt:

Formula: Aftertax Cost of Debt = [(Coupon Payment * (1 - Tax Rate)) + ((Par Value - Current Price) / Number of Years to Maturity)] / Average Price

Therefore, the aftertax cost of debt for Mojo Mining's bond is approximately 0.015 or 1.5%.

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