Pretax and aftertax cost of debt?
We are not told a face value, so I will assume a $1000 face value. There are n= 30-7 = 23years to maturity = 46 semiannual periods to maturity Coupon = 7% x 1000 = $70 annually = $35 semi-annually Therefore, set up the value equation 940 = (35/r) ( 1- (1+r)^(-46) ) + [ 1000/ (1+r)^46 ] Guess and chck for values of r. Note: r is a semiannual rate. The bond sells at a discount, so therefore the yield to materity must be less than the coupon rate (i.e. less than 7% / 2 = 3.5% semiannually) . After a while, r= 0.0377694= 3.78% semi-annually = 7.56 // I got a value this precise by just chucking the equation into an online calculator , but you should know how to find solutions to this by guessing and checking. When guessing and checking you only need a value precise to about 2 or decimal places http://www.wolframalpha.com/input/?i=940+%3D+%2835%2Fr%29+%28+1-+%281%2Br%29%5E%28-46%29+%29+%2B+%5B+1000%2F+%281%2Br%29%5E46+%5D+ Therefore A) Pretax cost of debt = 7.56% annually B) After tax cost of debt = 7.56% x (1-0.35) = 4.91% C) After tax cost is more relevant as you need an after tax discount rate to discount after tax cash flows.
Pretax cost of debt? Cost of Equity?
where w = weight, r=rate, e=equity, d=debt, t=tax rate in decimal form WACC = we(re) + wd(rd(1 - t)) to convert D/E to Debt/Capital (for purposes of determining the weight of debt in the above equation), use (D/E) / 1+(D/E)...= 0.72 /1.72 = 0.4186
How to find Pretax and Aftertax Cost of Debt?
Since the bond is selling for a premium, you know that the market rate of the debt is lower than the coupon rate... First solve for the YTM of the bond. 0 = 1100 + 55/(1+IRR/2) + 55/(1+IRR/2)^2 +...+1055/(1+IRR/2)^16, or use a financial calculator or spreadsheet YTM = 9.206357, round to 9.21%
How to find the pretax and aftertax cost of debt?
Tyler Corporation issued a 30-year, 7 percent semiannual bond 7 years ago. The bond currently sells for 94 percent of its face value. The company’s tax rate is 35%. A) What is Tyler Corporation’s pretax cost of debt? B) What is Tyler Corporation’s aftertax cost of debt? C) Which is more relevant, the pretax or the aftertax cost of debt? Why? Please help and Thank you.
Why do we use the after tax cost of debt in WACC? Or, put another way, why does the government give tax deductions on interest payment of debt?
When we calculate WACC what we want to calculate is the actual cost of the capital we are employing. To calculate this cost we take cost of each type of capital and calculate the average cost of the whole capital based on the weights which are again decided by the quantum of each type of capital we have.Now coming to the debt part. It is capital employed. Now when we take a debt from anyone in any form whether it be a debenture or a loan we have to pay interest on it.Paying this interest reduces our net profit. Again we also get a reduction in the total income calculated in accordance with the income tax act as this interest is considered as business expense.Now if we have incurred an expense of rs100 as interest then we would account these 100 as an expense. This in return would cause your profit to be reduced by 100 which results inyou not ppaying income tax on that 100.Now as you are saving taxes on rs100 let's say @30% then your total saving would be rs30 due to reduction in profit by 100.So you can consider this rs30 as the amount of income tax you would have had to pay had you not been paying any interest.So the real cost of that debt would be interest - tax savings.So real cost will be 100-30=70Due to this while calculating WACC we consider after tax cost of debts. As having to pay interest on those debts cause you a huge savings in tax and if you had earned that same profit by applying your own money you wouldn't be paying any interest and your cost for income tax would increase.
Trouble calculating cost of debt? pretax and aftertax? please help?
Doverfield, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 15 years to maturity that is quoted at 114 % of face value. The issue makes semiannual payments and has a coupon rate of 8 % annually. What is Merchandise s pretax cost of debt? If the tax rate is 35 %, what is the aftertax cost of debt?
How do you calculate pretax cost of debt?
suppose that the cost of debt is 10% and interest is tax deductible and your tax rate is 35%. say debt balance is $1000. the interest expense is 10% of 1000 = $100. that is what you pay to bondholder. but because it is deductible from your income, you saved 35% of it from your taxes. your tax savings are 35%*100 = $35. therefore your interest expense net of tax savings is only $100 - $35 = $65. We can generalize this relationship in algebraic form as follows: after-tax-cost-of-debt = before-tax-cost-of-debt * (1 - tax-rate) in this case after-tax-cost-of-debt = 10%*(1-0.35) = 6.5% hope that answered your question
How do you solve for Pretax Cost of Debit?
Blue Bull, Inc., has a target debt-equity ratio of 0.89. Its WACC is 8.8 percent, and the tax rate is 40 percent. Required: (a) If the company’s cost of equity is 12.9 percent, what is its pretax cost of debt? (Do not include the percent sign (%). Round your answer to 2 decimal places (e.g., 32.16).) Pretax cost of debt % (b) If the aftertax cost of debt is 5.5 percent, what is the cost of equity? (Do not include the percent sign (%). Round your answer to 2 decimal places (e.g., 32.16).) Cost of equity %
Finance Pretax and Aftertax Question?
I am struggling with pre-tax cost of debt and after-tax cost of debt. I know this is the "finance" forum, and not the "homewokr" fourm, but sturggling...Here is my problem Peyton’s Colt Farm issued a 30-year, 9.0 percent semiannual bond 7 years ago. The bond currently sells for 89.0 percent of its face value. The company’s tax rate is 35 percent. What is pretax cost of debt? What is aftertax cost of debt? Any and all tips, assistance, formuals, etc. would be greatly greatly appreciated. I am truly stuck. Thank you so much in advance.