Question

The coupon rate on an issue of debt is 8%. The yield to maturity on this issue is 10%. The corporate tax rate is 31%. What would be the approximate after-tax cost of debt for a new issue of bonds

Answer 1

The after-tax cost of debt for a new issue of bonds is 6.9%

Step-by-step explanation:

After tax cost of debt = Before tax cost * (1-tax rate)

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

After tax cost of debt = 10%*(1-0.31)

After tax cost of debt = 10%*0.69

After tax cost of debt = 6.9%