B. 12.30%, 7.38%
Explanation:
Cost of debt - the return that a company provides to its debt-holders and creditors
[tex]PV = CF [{\frac{1}{r} - \frac{1}{r(1 + r)^{n} } ] + \frac{FV}{(1 + r)^{n} }[/tex]
PV = present value = current value of future cash flow
FV = future value
CF = cash flow
R = payment
r = rate of interest
n = number of payments
Cash flows from the firm’s point of view over the maturity of the bond
[tex]t_{0}[/tex] = 980
[tex]t_{0} - t_{15}[/tex] = - 120
[tex]t_{15}[/tex] = - 1000
Before Tax
[tex]PV = CF [{\frac{1}{r} - \frac{1}{r(1 + r)^{n} } ] + \frac{FV}{(1 + r)^{n} }[/tex]
Net proceeds = [tex]N_{d} = 980[/tex]
Cash Flows = CF = - 120
n = 15
FV = - 1000
r = 12.30%
After Tax
After-Tax Cost of Debt = Before-Tax Cost of Debt × (1 – Tax Rate)
[tex]t_{c} =[/tex] 40%
[tex]r_{d} = r (1 - t_{c})[/tex]
= 12.30 (1 - 0.4)
= 7.38%
