Question

The YTM for a firm's bonds is 10%. The corporate tax rate is 40%. What is this firm's after-tax cost of debt

Answer 1

6

Explanation:

Given that

Yield to maturity = 10%

Tax rate = 40%

According to the given scenario, the computation of firm's after-tax cost of debt is shown below:-

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

= 10 × (1 - 0.4)

= 10 × 0.6

= 6

Therefore for computing the after-tax cost of debt we simply applied the above formula.