Terrier Company is in a 35 percent tax bracket and has a bond outstanding that y
ID: 2613033 • Letter: T
Question
Terrier Company is in a 35 percent tax bracket and has a bond outstanding that yields 9 percent to maturity.
a. What is Terrier's aftertax cost of debt? (Do not round intermediate calculations. Input your answer as a percent rounded in 2 decimals)
Aftertax cost of debt _____________%
b. Assume that the yield on the boind goes down by 1 percentage point, and due tom tax reform. the corporate tax rate falls to 20 percent. What is Terrier's new aftertax cost of debt? (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimals.)
c. Has the aftertax cost of debt gone up or down from part a to mpart b?
( ) It has gone up
( ) It has gone down
Explanation / Answer
(a)
Yield to maturity = 9%.
Tax bracket = 35%
Therefore, the after tax cost of debt = YTM (1-tax rate) = 0.09 ( 1 - 0.35) = 0.09 *0.65 = 0.0585.
Therefore, the after tax cost of debt is 5.85%.
(b)
Yield to maturity = 8%.
Tax bracket = 20%
Therefore, the after tax cost of debt = YTM (1-tax rate) = 0.08 ( 1 - 0.20) = 0.08 *0.80 = 0.064.
Therefore, the after tax cost of debt is 6.40%.
(c)
The after tax cost of debt has gone up from 5.85% to 6.40%.
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