5 years ago, Barton Industries issued 25-year noncallable, semiannual bonds with a $1,000 face value and an 11% coupon, semiannual payment ($55 payment every 6 months). The bonds currently sell for $844.87. If the firm's marginal tax rate is 25%, what is the firm's after-tax cost of debt?

9.84%

Explanation:

The bond's yield to maturity( pre-tax cost of debt) can be determined using the financial calculator approach as below:

N=50 (number of semiannual coupons in 25 years i.e 25*2)

PMT=55 (semiannual coupon=face value*coupon rate*6/12=$1000*11%*6/12=$55)

PV=-844.87 (current market price)

FV=1000 (face value)

CPT I/Y=6.56% (semiannual yield)

annual yield=6.56% *2=13.12%

after tax cost of debt=pretax cost of debt*(1-tax rate)

after tax cost of debt=13.12% *(1-25%)=9.84%

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