A Bond With A 1000 Par And Face Value A Contract Or Co

A Bond That A 1000 Par Value Face Value And A Contract Or Coupon In

A bond that a $1000 par value (face value) and a contract or coupon interest rate is 10.9%. The bonds have a current market value of $1,123 and will mature in 10 years. The firm’s marginal tax rate is 34%. A new common stock issue that paid a $1.76 dividend last year. The firm’s dividends are expected to continue to grow at 7.9% per year forever. The price of the firm’s common stock is now $27.13. A preferred stock paying 9.2% dividend on a $131 par value. A bond selling to yield 12.6% where the firm’s tax rate is 34%. The cost of Capital from this bond debt is?

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The calculation of the cost of capital associated with a bond involves determining its effective yield, which is the return required by investors based on its current market price and coupon payments. In this case, the bond has a face value of $1,000, a coupon rate of 10.9%, a market price of $1,123, and a maturity period of 10 years. Additionally, since the firm’s tax structure is relevant, the after-tax cost of debt is also considered, because interest payments are tax-deductible. The enterprise’s overall financing cost thus reflects both the yield on the bond and tax effects.

To find the yield to maturity (YTM), which is the effective yield or cost of the bond before tax effects, we use the following known data: PV = -1,123 (present value or bond price), FV = 1,000 (par value), PMT = 109 (annual coupon payment, which is 10.9% of 1,000), and N = 10 years. The formula is complex to solve manually; therefore, financial calculators or Excel functions such as RATE are typically utilized to determine the YTM. Using such tools, the approximate YTM is found to be around 9.0%.

Once the YTM is estimated at approximately 9.0%, the after-tax cost of debt can be calculated. Since interest expense is tax-deductible, the effective cost to the company is reduced by the corporate tax rate. Mathematically, this is expressed as:

After-tax cost of debt = YTM × (1 - tax rate) = 9.0% × (1 - 0.34) ≈ 5.94%.

Therefore, the firm's cost of debt, considering tax effects, is approximately 5.94%. This represents the after-tax cost of capital derived specifically from the bond component of the firm's capital structure. It is important to note that this strict tax-adjusted yield provides an accurate estimate for work in calculating weighted average cost of capital (WACC).

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