Gibson Industries is issuing a $1,000 par value bond with an 8% semi-annual interest coupon rate and that matures in 11 years. Investors are willing to pay $972 for these bonds. Gibson is in the 34% tax bracket
What will be the after-tax cost of debt of the bond?
Answer: Using a financial calculator, N = 11 × 2, PV = -972, PMT = 80/2, FV = 1000. Solving for i, we get 4.197% or an annual yield of 8.39%.
After-tax cost of debt = 8.39(1 - .34)
After-tax cost of debt = 5.54%
Business
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