Jiminy's Cricket Farm issued a 20-year, 7 percent, semiannual bond four years ago. The bond currently sells for 108 percent of its face value. What is the aftertax cost of debt if the company's combined tax rate is 23 percent?

After tax cost of debt is 4.77%

Explanation:

The after tax cost of debt is the yield on the debt after tax advantage of 23% per year.

The starting point would be to calculate the yield on the debt

=rate(nper,pmt,-pv,fv)

nper is the period to maturity and it is  16 years multiplied by 2 since coupon interest is paid semi-annually,i.e 32

pmt is 7%/2 multiplied by $1000 face value =7%/2*$1000=$35

pv is 108% of face value =108%*$1000=$1080

fv is the par value of $1000

=rate(32,35,-1080,1000)

=3.10%

The 3.10% is a semi-annual yield, while 3.10%*2 gives 6.20% annual yield

After tax cost of debt=6.20%*(1-t) where t is tax

After tax cost of debt=6.20%*(1-0.23)

                                     =4.77%

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