Final answer:
Temple's after-tax cost of debt on the bond is approximately 6.79%, which is calculated by adjusting the before-tax cost of debt (8.938%) for taxes at a 24% rate.
Step-by-step explanation:
To calculate Temple's after-tax cost of debt on the bond, we first need to determine the before-tax cost of debt (also known as the yield to maturity) and then make adjustments for taxes. The annual interest is 8.5% of the $1,000 par value, which is $85 per year. Since investors are willing to pay $951 for the bond, we use these figures to calculate the before-tax cost of debt, which can be estimated using the formula for the current yield (annual interest payment divided by the current bond price). Therefore, the before-tax cost of debt is $85 / $951 = 0.08938 or 8.938%.
Next, to find the after-tax cost of debt, we need to account for the fact that interest payments are tax-deductible. Thus, we adjust the before-tax cost of debt by the tax rate (1 - tax rate). With a tax rate of 24%, the after-tax cost of debt is 8.938% * (1 - 0.24) = 6.79288% or approximately 6.79%.
Therefore, Temple's after-tax cost of debt on the bond is approximately 6.79%.