Lenovo issued 30-year, 7.7 percent semiannual bonds 6 years ago. The bonds sell presently at 101 percent of face value. What is the company's after-tax cost of debt if the tax rate is 35 percent?
Lenovo issued 30-year, 7.7 percent semiannual bonds 6 years ago. The bonds sell presently at 101 percent of face value. What is the company's after-tax cost of debt if the tax rate is 35 percent?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Lenovo issued 30-year, 7.7 percent semiannual bonds 6 years ago. The bonds sell presently at 101 percent of face value. What is the company's after-tax cost of debt if the tax rate is 35 percent?
Expert Solution
Step 1
Before tax cost of debt is the yield to maturity of the bond and is the rate of return which investors expect on holding the bond till maturity.
According to the given information, Bond with face value (FV) $1000, is trading at $1010 (101%*1000) with 24 years (30 years -6 years) left to maturity. Therefore, number of periods (NPER) to maturity is 48 (24*2). Semi-annual coupon rate is 3.85% (7.7%/2).
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