Question

The Holmes Company's currently outstanding bonds have a 9% coupon and a 12% yield to maturity. Holmes believes it could issue new bonds at par that would provide a similar yield to maturity. If its marginal tax rate is 40%, what is Holmes's after-tax cost of debt? Round your answer to two decimal places.

Answer 1

7.20%

Step-by-step explanation:

Given that

Coupon rate = 9%

Yield to maturity = 12%

And marginal tax rate is 40%

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

= Yield to maturity × (1 - tax rate)

= 12% × (1 - 0.40)

= 7.20%

After considering the tax rate and then multiplying with the yield to maturity we can get the after tax cost of debt

We ignored the coupon rate