A firm issues a 10-year debt obligation that bears a 12% coupon rate and gives the investor the right to put the bond back to the issuer at the end of the fifth year at 103% of its face amount. The issue has no sinking fund. Interest is paid semiannually.
The issuer's tax rate is 34%.
A. Calculate the after-tax cost of debt, assuming the debt remains outstanding until maturity.
n = 20 r = ? PV = -$1,000 PMT = (1-0.34)60 = $39.6 FV = $1,000 r = 3.96%
APY = 8.077%
B. Calculate the after-tax cost of debt, assuming investors put the bond back to the firm at the end of the fifth year. (Note: Any unamoritized issuance expenses and any redemption premium can be deducted for tax purposes in the year of redemption.)