# Simple Foods has a zero coupon bond issue outstanding that matures at nine years. The bonds are selling at 42% of par value. What is the company's after tax cost of debt if the tax rate is 38%? (Use semi annual compounding)

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Simple Foods has a zero coupon bond issue outstanding that matures at nine years. The bonds are selling at 42% of par value. What is the company's after tax cost of debt if the tax rate is 38%? (Use semi annual compounding)

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Step 1

The company has a zero coupon bond that matures in 9 years with semiannual compounding.

Par Value (FV) = \$1,000

Price (P) = 42% * \$1000 = \$420

Semiannual YTM ( r ) = to be determined

Number of periods (n) = 9*2 = 18

Yield to maturity can be calculated as below:

Step 2

Annual YTM is semiannual YTM multiplied by 2.

Step 3

After tax cost of debt is c... help_outlineImage TranscriptioncloseAfter tax cost of debt = Annual YTM x(1 -tax rate) =9.87494273224083% x (1-0.38) 6.12246449398932% or 6.12% fullscreen

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