Bakersfield Company wants to issue discount bonds with a market value equal to 60% of their face value. The bonds will carry 6% coupon, paying interest semiannually, and they will mature after 10 years. The income tax rate of Bakersfield is 35%.
(A) Calculate the approximate yield-to-maturity of the bonds, and then the after-tax cost of debt for Bakersfield.
(B) Using the concept of original issue discount, write an equation that would give the after-tax cost of debt for Bakersfield. How do you solve this equation by using Excel?