Pre-tax Cost of Debt

# Pre-tax Cost of Debt - costs amount to \$55 per bond...

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What is the pre-tax and after-tax cost  of debt for McDermott Corporation? Pre-Tax Cost of Debt : PV:  925  [\$1000 par received less \$75 flotation] PMT:  -50   [\$1000 par x 10%=\$100; 100/2=50] FV:  -1000   [\$1000 par due at maturity] N:  20  [10 years x 2 for semiannual pmts] I/Yr:  ? 5.6346 [5.6346 x 2 = 11.269] K d(Before   Tax)  : 11.27% After Tax Cost of Debt :   K d(After Tax)     =  K d(Before Tax)  * (1 - Tax Rate)   K d(After Tax)     =    0.1127 * (1 - 0.32)   K d(After Tax)   =    0.0766    =   7.7% Cassidy Corporation issues a  \$1,000 par 30 year  bond  paying the market rate of  8.5% Coupons are  semiannual .  The   bond will sell for par since it pays   the market rate , but flotation

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Unformatted text preview: costs amount to \$55 per bond. Cassidy’s marginal tax rate is 35% . What is the pre-tax and after-tax cost of debt for Cassidy Corporation? Pre-Tax Cost of Debt : PV: 945 [\$1000 par received less \$55 flotation] PMT: -42.50 [\$1000 par x 8.5%=85; 85/2=42.50] FV: -1000 [\$1000 par due at maturity] N: 60 [30 years x 2 for semiannual pmts] I/Yr: ? 4.5173 % [4.5173 x 2 = 9.0346] K d(Before Tax) : 9.03% After Tax Cost of Debt : K d(After Tax) = K d(Before Tax) * (1 - Tax Rate) K d(After Tax) = 0.0903 * (1 - 0.35) K d(After Tax) = 0.0587 = 5.87%...
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## This note was uploaded on 11/23/2011 for the course BUS M 301 taught by Professor Jimbrau during the Summer '11 term at BYU.

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Pre-tax Cost of Debt - costs amount to \$55 per bond...

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