Question

Asked Nov 22, 2019

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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)

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...

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