Portland Company wants to issue discount bonds with a market value equal to 76% of their face value. The bonds will carry 5% coupon, paying interest semiannually, and they will mature after 10 years. The income tax rate of Portland is 30%.
(A) Calculate the approximate yield-to-maturity of the bonds, and then the after-tax cost of debt for Portland. Show solutions
(B) Using the concept of original issue discount, write an equation that would give the after-tax cost of debt for Portland. Solve this equation by using WolframAlpha, Maple, or Excel to find the after-tax cost of debt for Portland. Show solutions