Question

Laurel, Inc., has debt outstanding with a coupon rate of 5.9 % and a yield to maturity of 7.2 %. Its tax rate is 38 %. What is​ Laurel's effective​ (after-tax) cost of​ debt? ​ NOTE: Assume that the debt has annual coupons. ​Note: Assume that the firm will always be able to utilize its full interest tax shield. The effective​ after-tax cost of debt is nothing​%.

Answer 1

effective​ (after-tax) cost of​ debt = 4.464 %

Step-by-step explanation:

given data

coupon rate = 5.9 %

yield to maturity = 7.2 %

tax rate = 38 %

to find out

effective​ (after-tax) cost of​ debt

solution

we get here effective​ (after-tax) cost of​ debt that is express as

effective​ (after-tax) cost of​ debt = Yield to maturity × ( 1 - Tax rate) ..........1

put here value we get

effective​ (after-tax) cost of​ debt = 7.2% × ( 1 - 38 % )

effective​ (after-tax) cost of​ debt = 0.072 × ( 1 - 0.38 )

effective​ (after-tax) cost of​ debt = 0.072 × 0.62

effective​ (after-tax) cost of​ debt = 0.04464

effective​ (after-tax) cost of​ debt = 4.464 %