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. To start, we must compute the after-tax cost of debt which is equal to (1-T) x I where T is the marginal tax rate and I is the interest rate on the bonds. In this case, that would come out to (1-.34) x 10.1% = 6.726%.

Next, we can calculate the price of debt which is equal to par value divided by market value or $1000/$1130=0.886. Multiplying these two values together gives us an after-tax cost of capital for debt of 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.