Question

Beckham Corporation has semiannual bonds outstanding with 13 years to maturity and the bonds are currently priced at $746.16. If the bonds have a coupon rate of 8.5%, then what is the after-tax cost of debt for Beckham if its marginal tax rate is 35%?a. 6.250%.b. 12.890%.c. 12.500%.d. 8.125%.

Answer 1

Answer:

d. 8.125%.

Explanation:

The computation of the after tax cost of debt is shown below:

Given that

NPER = 13 × 2 = 26

PMT = $1,000 × 8.5% ÷ 2 = $42.50

Assume future value would be $1,000

Present value is $746.16

The formula is given below:

= RATE(NPER;PMT;-PV;FV;TYPE)

After applying the above formula, the rate is

= 6.25% × 2

= 12.50%

Now the after tax cost of debt is

= 12.50% × (1 - 0.35)

= 8.125%

Hence, the correct option is d. 8.125%