Answer:
After tax cost of debt is 4.77%
Explanation:
The after tax cost of debt is the yield on the debt after tax advantage of 23% per year.
The starting point would be to calculate the yield on the debt
=rate(nper,pmt,-pv,fv)
nper is the period to maturity and it is 16 years multiplied by 2 since coupon interest is paid semi-annually,i.e 32
pmt is 7%/2 multiplied by $1000 face value =7%/2*$1000=$35
pv is 108% of face value =108%*$1000=$1080
fv is the par value of $1000
=rate(32,35,-1080,1000)
=3.10%
The 3.10% is a semi-annual yield, while 3.10%*2 gives 6.20% annual yield
After tax cost of debt=6.20%*(1-t) where t is tax
After tax cost of debt=6.20%*(1-0.23)
=4.77%
