Question

he treasurer of Riley Coal Co. is asked to compute the cost of fixed income securities for her corporation. Even before making the calculations, she assumes the aftertax cost of debt is at least 2 percent less than that for preferred stock. Debt can be issued at a yield of 11.4 percent, and the corporate tax rate is 30 percent. Preferred stock will be priced at $63 and pay a dividend of $5.50. The flotation cost on the preferred stock is $8. a. Compute the aftertax cost of debt.

Answer 1

7.98 %

Step-by-step explanation:

Debt is any source that requires repayment of a fixed amount as interest to the holder of the source of finance.

Since we are given the Yield, we can safely use that to calculate the After tax cost of debt as follows

After-tax cost of debt = Interest x ( 1 - tax rate)

= 11.40 % x ( 1 - 0.30)

= 7.98 %