- CFA Exams
- CFA Level I Exam
- Study Session 10. Corporate Finance (1)
- Reading 33. Cost of Capital
- Subject 2. Cost of Debt and Preferred Stock

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**CFA Practice Question**

A company is considering issuing a 10-year, option-free, semi-annual coupon bond with a 9 percent coupon rate. The bond is expected to sell at 95 percent of par value. If the company's marginal tax rate is 30 percent, then the after-tax cost of debt is closest to ______.

A. 6.20%

B. 6.86%

C. 7.38%

**Explanation:**Using a financial calculator: N = 20, PMT = 45, PV = -950, FV = 1000; solve for I/Y = 4.90%. The annual yield is twice the semi-annual yield = 4.90% x 2 = 9.80%. The after-tax cost of debt = annual yield x (1 - t) = 9.80% x (1 - 0.30) = 6.86%.

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**User Contributed Comments**
3

User |
Comment |
---|---|

chris297 |
I dont get it. Why PMT =45? |

ahouse61 |
half of 9% |

Jdadd21 |
semiannual coupon of 9% / 2 = 4.5% x $1,000 = $45 |