Question

Ladder Works has debt outstanding with a coupon rate of 6 percent and a yield to maturity of 6.8 percent. What is the aftertax cost of debt if the tax rate is 21 percent

Answer 1

5.372%

Step-by-step explanation:

Given that

Coupon rate = 6 percent

Yield to maturity = 6.8%

Tax rate = 21 percent

So by considering the above information, the after tax cost of debt is

= Yield to maturity × (1 - tax rate)

= 6.8% × (1 - 0.21)

= 5.372%

We simple multiply the yield to maturity with the after tax rate so that the approximate cost of debt could come

Ignored the coupon rate as it is not relevant for the above computation