Interest rate of 10%; tax rate of 25%? Interest rate of 10%;tax rate 30%? Outsta

Question

Interest rate of 10%; tax rate of 25%? Interest rate of 10%;tax rate 30%? Outstanding 10% coupons bonds have a yield to rate maturity of 14%. New bonds issues at par provide similar yield to maturity. If it's margin tax rate is 35% what is the after-tax cost of debt? Interest rate of 10%; tax rate of 25%? Interest rate of 10%;tax rate 30%? Outstanding 10% coupons bonds have a yield to rate maturity of 14%. New bonds issues at par provide similar yield to maturity. If it's margin tax rate is 35% what is the after-tax cost of debt?

Explanation / Answer

If it's margin tax rate is 35%

Rd(1-T) = 14%(1.0-.35)
Rd(1-T) = 14%(.65)
After-tax cost of debt = 9.1%

Interest rate of 10%; tax rate of 25%

Rd(1-T) = 14%(1.0-.25)
Rd(1-T) = 14%(.75)
After-tax cost of debt = 10.5%

Interest rate of 10%;tax rate 30%

Rd(1-T) = 14%(1.0-.30)
Rd(1-T) = 14%(.70)
After-tax cost of debt = 9.8%

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