Suppose your firm just issued a 20-year, $1000 par value bond with semiannual coupons. The coupon interest rate is 9%. The bonds sold for par value, but flotation costs amounted to 5% of the price. You have a 21% corporate tax rate. What is your firm's after-tax cost of debt? Group of answer choices

4.78%

Explanation:

From the question given, we solve the issue

the calculation of he bond price is:

Price of bond = per value * (1 - flotation cost)

$1000 * (1 - 0.05)

= $950

For the calculation of semi-annual coupon payments,

Semi - annual coupon payment = Par value * Interest/2

$1000 * 0.09/2 = $45

Calculation of semi - annual yield to maturity

Let recall the following

YTM = yield to maturity

C = The semi-annual coupon payment

FV = Face value or par value

PV = Price of a bond

n = Maturity years of the bond

Therefore,

YTM = C + FV - PV/n / FV + PV/2

which is

$45 + $1000 - $950/40/$1000 + $950 / 2 = 4.78%