Question

Mashimaru Enterprise has 12,000 bonds outstanding at a quoted price of 98 percent of face value. The bonds mature in eleven years and carry a 9 percent interest rate. What is Jennifer's after-tax cost of debt if the applicable tax rate is 35 percent?

a.3.15 percent
b.6.23 percent
c.8.16 percent
d.5.85 percent

Answer 1

The question asks for the after-tax cost of debt for Mashimaru Enterprise given certain bond characteristics and a tax rate. To calculate it, you need to find the annual interest payment, adjust for the price of the bond, and then apply the tax rate to the before-tax cost of debt. However, without the face value of the bonds, it's not possible to provide a definitive answer.

Step-by-step explanation:

The subject of this question is the calculation of Jennifer's after-tax cost of debt for Mashimaru Enterprise. The corporation has bonds outstanding with certain characteristics, and we need to determine the cost of debt after considering the tax implications. Here's how we would approach the problem:

First, we identify the annual interest payment per bond which would be 9% of the face value. Since the bonds are quoted at 98 percent of face value, the cost of the bond is 98% of its face value. The after-tax cost of debt is then the interest payment less the tax shield provided by the tax deductibility of the interest expense.

1. Calculate the annual interest payment: Face value × Interest rate.
2. Determine the price of each bond: Quoted price × Face value.
3. Calculate the before-tax cost of debt: Annual interest payment ÷ Bond price.
4. Apply the tax rate to find the after-tax cost of debt: Before-tax cost of debt × (1 - Tax rate).

However, in this particular case, we would need more information to accurately compute the after-tax cost of debt, such as the face value of the bonds. Without the face value, we cannot determine the annual interest payment and therefore cannot calculate the after-tax cost of debt.