QUESTION 34 3 points save Ans Suppose you are trying to estimate the after tax c

Question

QUESTION 34 3 points save Ans Suppose you are trying to estimate the after tax cost of debt for a firm as part of the calculation of the Weighted Average Cost of Capital (WACC). The corporate tax rate for this firm is 39% The firm's bonds pay interest semiannually with a 58% coupon rate and have a maturity of 7 years. If the annual yield to maturity of the bonds is 6.15%, what is the after tax cost of debt for this firm? (Answer to the nearest hundredth of a percent e g 12 34%, but do not use a percent sign)

Explanation / Answer

After tax cost of debt:

= Annual yield to maturity*(1-Tax rate)

= 6.15%*(1-39%)

= 3.75%

Hence, after-tax cost of debt is 3.75%

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