Netflix Inc wants to issue discount bonds with a market value equal to 45% of their face value. The income tax rate of Netflix is 30%. The bonds will carry 3.5% coupon, paying interest semi annually, and they will mature after 10 years.
(A) Calculate the approximate yield-to-maturity of the bonds, and then the after-tax cost of debt for Netflix.
Answer: 8.69%
(B) Using the concept of original issue discount, write an equation that would give the after-tax cost of debt for Netflix. Solve this equation by using Maple, WolframAlpha, or Excel.
Answer: 9.675%