ACCA FM · Chapter 11 · Question 5 of 11
A company has irredeemable bonds with a coupon rate of 8% on a nominal value of $100. They are trading at $96 ex interest. Corporation tax is 25%. What is the after-tax cost of the debt (to 2 decimal places)?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) 6.25%
Explanation
For irredeemable debt, Kd (after tax) = I(1 - T) / P0 = 8 x (1 - 0.25) / 96 = 6 / 96 = 6.25%. Ignoring tax gives the pre-tax cost of 8.33%, 6.00% wrongly uses nominal value rather than market value, and 5.77% wrongly adds the interest to the ex-interest price.
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