[Anonymous]

Hi everyone,I am new accounting student looking for some help understanding this problem:

CLIPPERS manufacturing issued a 10 year, 12% semiannual bond 5 years back. The debt issue is currently priced at $925. The firm’s marginal tax rate is 39%. What is CLIPPERS ‘s after-tax component cost of debt?

Below is the formula I did study during class; but I just can’t figure out how to apply it in this problem

After-Tax Cost of Debt = Before Tax Cost of Debt × (1 – Tax Rate)

Appreciate any help!

Thx

Kevin

[ohiostategirlcpa]

after tax cost = Yield to Maturity x .61
YTM is 14.14%, so answer is 8.625%

YTM requires calculating the value of the annuity for 10 periods of the interest $60 + Future Value of $1000 (par value)

The Present Value is -925

With a financial calculator you get 14.14%

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[Anonymous]

Hi:
Thank you so much for the help,
Can you please explain this part little more and specially the <$60>
<<YTM requires calculating the value of the annuity for 10 periods of the interest $60 + Future Value of $1000 (par value)>>
Thank you!
Kevin

[Credit Revenue]

The bond pays 12% per year for 5 years. The payments are semiannual… Therefore twice a year. Half of 12% is 6%. $1,000 is the par value for a bond. 1000 * .06 = $60. You need a financial calculator or a spreadsheet to calculate present and future values. Do you understand present value? Maybe the person who original answered can help more.

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[Anonymous]

Got it, Thank you so much!

[Author]

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