Galvatron Metals has a bond outstanding with a coupon rate of 6.1 percent and semiannual payments. The bond currently sells for $1,933 and matures in 19 years. The par value is $2,000 and the company's tax rate is 35 percent. What is the company's aftertax cost of debt

After tax cost of debt is 4.16%

Explanation:

The yield on the debt which is pre-tax cost of debt can be computed using the rate formula in excel, which is given as follows:

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

where nper is the number of coupon payments, this is calculated as 19*2 since it has a semi-annual coupon interest

pmt is the periodic coupon payment 6.1%/2*$2000=$61

pv is the current price of the bond which is $1933

fv is the face value repayable on redemption $2000

=rate (38,61,-1933,2000)

=3.20%

This is semi-annual yield, annual yield is 3.20%*2=6.40%

After tax cost of debt=6.40% * (1-t)

where t is the tax rate at 35%=0.35

after tax cost of debt=6.40% * (1-0.35)

=4.16%