Question

The Holmes Company's currently outstanding bonds have a 8% coupon and a 12% yield to maturity. Holmes believes it could issue new bonds at par that would provide a similar yield to maturity. If its marginal tax rate is 35%, what is Holmes's after-tax cost of debt? Round your answer to two decimal places.

Answer 1

after tax cost of debt 7.8%

Step-by-step explanation:

The after tax would be:

cost of debt (1 - taxes) = after-tax cost of debt

the cost of debt will be the 12% yield because the current and new debt will be effectively financed with this rate.

.12 x (1-0.35) = 0.078 = 7.8%