Answer:
Mojo Mining
The aftertax cost of debt is:
= 3.6%.
Explanation:
a) Data and Calculations:
Bonds outstanding value = $1,040
Maturity period = 18 years
Payment of interest = semiannual
Coupon rate = 5.54% per annum
Coupon rate per half-year = 2.77% (5.54%/2)
Company's tax rate = 35%
Aftertax cost of debt = 5.54% (1 - 0.35)
= 5.54% * 0.65
= 0.036
= 3.6%
b) Mojo Mining's aftertax cost of debt is a product of its cost of debt of 5.54% and the difference between tax savings, which results from the deduction of interests on the debt.
