USA Manufacturing issued 30-year, 7.5 percent semiannual bonds 6 years ago. The bonds currently sell at 101 percent of face value. What is the firm's aftertax cost of debt if the tax rate is 35 percent

48%

Explanation:

The after-tax cost of debt is the interest paid on debt less any income tax savings due to deductible interest expenses

Coupon Rate = 7.5%

Years to maturity = 24

NPER = 48 (years to maturity x 2)

PMT = 37.5 ((Face value x coupon rate ) /2)

Face value = $1,000

PV = $1,010

Rate = 3.71%

Yield = Rate x 2

Yield = 3.71 x 2 = 7.41%

Pre-tax cost of debt = 7.41%

After tax cost of debt = 7.41%(1 - tax rate )

After tax cost of debt = 7.41% ( 1 - 0.35 )

After tax cost of debt = 0.048165 OR 48%

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