Packman corporation has semiannual bonds outstanding with nine years to maturity and are currently priced at $754.08. if the bonds have a coupon rate of 7.25 percent, then what is the after-tax cost of debt for packman if its marginal tax rate is 30 percent? complete the calculation as is done on wall street.

a. 7.050%
b. 8.225%
c. 12.095%
d. 11.750%

b. 8.225%

Explanation:

In this question, we use the Rate formula which is shown in the spreadsheet.  

The NPER represents the time period.  

Given that,  

Present value = $754.08

Assuming figure - Future value or Face value = $1,000  

PMT = 1,000 × 7.25% ÷ 2 = $36.25

NPER = 9 years × 2 = 18 years

The formula is shown below:  

= Rate(NPER,PMT,-PV,FV,type)  

The present value come in negative  

So, after solving this,  

1. The pretax cost of debt is 11.75%

2. And, the after tax cost of debt would be

= Pretax cost of debt × ( 1 - tax rate)

= 11.75% × ( 1 - 0.30)

= 8.225%

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2. a talk with them

3. ask someone you trust

4. ignore

5. call police