Question

The Holmes Company's currently outstanding bonds have a 9% coupon and a 14% 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 25%, what is Holmes' after-tax cost of debt

Answer 1

10.5%

Step-by-step explanation:

Holmes company currently have an outstanding bond of 9% coupon

They also have a 14% yield to maturity

= 14/100

= 0.14

The marginal tax rate is 25%

= 25/100

= 0.25

The after-tax cost of debt can be calculated as follows

After tax-cost of debt= Yield to maturity × (1-tax rate)

= 0.14× (1-0.25)

= 0.14×0.75

= 0.105×100

= 10.5%

Hence the after-tax cost of debt for Holmes company is 10.5%