Question

The outstanding bonds of The Purple Fiddle are priced at​ $898 and mature in nine years. These bonds have a 6 percent coupon and pay interest annually. The​ firm's tax rate is 35 percent. What is the​ firm's after tax cost of​ debt?

Answer 1

Answer : 4.34 %

Explanation: The effective interest rate a company pays on its debt obligation is called cost of debt. The cost of debt is denoted by [k]x_{d}[/tex] . As there is a tax shield available on debt interest it is generally calculated by subtracting the marginal tax rate from before tax cost of debt .

.

`k_(d)=(c)/(p)*\left ( 1-t \right )`

where,

c= coupon payment = 1000 * 6% = 60

p = current market price = $898

t= marginal tax rate

therefore :-

=
`(60)/(898)* \left ( 1-0.35 \right )`

= 4.34 %