Question

The Holmes Company's currently outstanding bonds have an 8% coupon and an 11% 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

If its marginal tax rate is 25%, Holmes' after-tax cost of debt is 8.25%

Step-by-step explanation:

In order to calculate Holmes' after-tax cost of debt If its marginal tax rate is 25% we would have to calculate the following formula:

After-tax cost of debt =yield to maturity*(1-marginal tax rate)

According to the given data we have the following:

yield to maturity=11%

marginal tax rate=25%

Therefore, After-tax cost of debt =11%*(1-0.25)

After-tax cost of debt =8.25%

If its marginal tax rate is 25%, Holmes' after-tax cost of debt is 8.25%