Question

​Laurel, Inc., has debt outstanding with a coupon rate of 5.9 % and a yield to maturity of 7.1 %. Its tax rate is 40 %. 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.

Answer 1

4.26%

Step-by-step explanation:

The computation of the Laurel's effective​ (after-tax) cost of​ debt is shown below:

= Cost of debt × (1 - tax rate)

= 7.1% × (1 - 0.40)

= 4.26%

The cost of debt is also known as the yield to maturity.

For computing it, we deduct the tax rate from the cost of debt so that the accurate rate can come

All other information which is given is not relevant. Hence, ignored it