# After-tax cost of debt question

A firm has \$3 mn in outstanding bonds, with an 8% fixed rate (assume annual payments). The bonds trade at \$92 per \$100 par. The firm’s marginal tax rate is 35%. What is the after-tax component cost of debt to be used in calculating WACC? ANSWER If the bonds are trading at \$92 per \$100 par, the required yield is 9.26%, and the market value of the issue is \$2.76 million. The equivalent after-tax cost of this financing is: 9.26% (1 – 0.35) = 6.02%. I don’t get get it. How do they get to 9.26%? and then \$2.76million ? HELP PLEASE!

when par is \$100, bonds trading at \$92 (market value) when par is \$3mn, bonds trading at 92/100 x 3mn = 2.76 (market value) cost of debt, rd, is YTM: …9.26??? will come back to it later …I used BassII and it gives me 10.1%…

is it mentioned anywhere that these are 10 year bonds? using 10 years - you do get 9.26 as the YTM PMT=8 FV=100 PV=-92 I/Y=? N=10

Yes you are right I seemed to have left that out…they are 10 year bonds. Thanks imranmir1 and cpk123, I get it now. (I LOVE this Forum)