Solution method uses PV function$/$formula

Guidelines:

$--$ To view guidelines, move mouse pointer over cell with red triangle. Red triangle identifies a cell comment.

Problem:

Current cost of a bond: You know that the after$-$tax cost of debt capital for Bubbles Champagne Company is $7$ percent. If the firm has only one

issue of five$-$year bonds outstanding, what is the current price of the bonds if the coupon rate on those bonds is $10$ percent? Assume the bonds

make semiannual coupon payments and the marginal tax rate is $30$ percent.

Unknown:

Before tax cost of debt and current price of bond.

Assumption$($s$)$

Par or face value of bond is $$1,000$

After tax cost of debt is an annual rate with semiannual compounding

Given information$/$inputs$/$arguments:

After tax cost of debt

Maturity date, future years

Annual coupon rate on bonds

Times per year that interest paid

Marginal tax rate

Par or face value of bond

Argument for PV function, type

Values

Comments

Enter percent as XX$.$XX$\%$ or decimal, $.$XXXX

Enter amount as positive value

Enter percent as XX$.$XX$\%$ or decimal, XXXX

Compounded semiannually

Enter percent as XX$.$XX$\%$ or decimal, $.$XXXX

Enter amount as positive value

For type enter zero, regular annuity

Excel solution method using PV function:

Before tax cost of debt

Price of bond, use PV function