help needed.....before tax cost of debt

CFA Level I Corporate Finance
#1

Hi,

I was wondering if anyone could help me out on this question.

Q23 EOC, Reading 37

To calculate after tax cost of debt I first need to find the before tax cost of debt. The par value and the coupon rate of the bond is given but nothing else. The explanation is not very clear in the book.

In summary the company issued 20 million in long term bonds at par value wth coupon rate of 9 percent, two years ago. The company has decided to issue an additional 20 million in bonds and expects the new issue to be priced at par value with a coupon rate of 7 percent.no other debt outstanding. The tax rate is given so once i have the before tax cost of debt, rest will be easy

Thanks

#2

When bonds are issued at par, the YTM equals the coupon rate.

Thus, the before-tax cost of debt will be 7%.

#3

thanks a lot!

#4

You’re quite welcome.