P9-5 After-Tax Cost of Debt. For each of the following $1,000 - par- value bonds, assuming annual interest payment and a 21% tax rate, calculate the after-tax cost of debt. 

Bond	Life (years)	Underwriting Fee	Discount (-) or Premium (+)	Coupon Interest Rate
A	20	$25	-$20	9%
B	16	$40	+$10	10%
C	15	$30	-$15	12%
D	25	$15	PAR	9%
E	22	$20	-$60	11%

 

Bond A

Net proceeds = ($1000 - $25 - $20) = $955.00

Interest = 1000 * 9% = 90.00

Interest payment = $90 (1 - 0.21) = $71.10

After tax cost of debt = $71.10 / $955 = 7.46%

Bond B

Net proceeds = ($1000 + $10 - $40) = $970.00

Interest = $1000 * 10% = $100.00

Interest payment = $100 (1 - 0.21) = $79.00

After tax cost of debt = $79 / $970 = 8.14%

Bond C

Net proceeds = ($1000 - $15 - $30 = $955

Interest = $1,000 * 12% = $120.00

Interest payment = $120 (1 - 0.21) = $94.80

After tax cost of debt = $94.80 / $955 = 9.94%

Bond D

Net proceeds = ($1,000 + $15 = $1,015.00

Interest = $1,000 * 9% = $90.00

Interest payment = $90 (1 - 0.21) = $71.10

After tax cost of debt = $71.10 / $1,015 = 7.01%

Bond E

Net proceeds = ($1,000 - $60 - $20 = $920.00

Interest = $1,000 * 11% = $110.00

Interest payment = $110 (1 - 0.21) = $86.90

After tax cost of debt = $86.90 / $920 = 9.45%

 

Am i correct? If not, can you please explain how to solve this question. Thank you in advance!

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