The bonds have a current market value of $1,130 and will mature in 10 years. The firms marginal tax rat is 34%. marlon. What is the cost of  capital from this bond debt? 

The cost of capital for the firm in this instance can be calculated by taking into account both the bond’s current market value and its contract or coupon interest rate. We must first calculate the cost after tax of the debt, which equals (1-T)xI where T represents the marginal rate of tax and I represents the interest rate. In this case, that would come out to (1-.34) x 10.1% = 6.726%.

We can then calculate the cost of debt by dividing par value by market value, or 1000/1130 = 0.886. By multiplying the two numbers together, we get an after-tax capital cost for debt equal to 0.0594 (or 5.94%). Finally, when adding in any other forms of financing such as equity or preferred stock then this total figure can be used to determine a company’s overall cost of capital over time.