Question

A firm has outstanding debt with a coupon rate of 6%, ten years maturity, and a price of $1000 per $1000 face value. What is the after-tax cost of debt if the marginal tax rate of the firm is 35%? O A. 35% OB. 3.1% OC. 4.1% OD. 3.9%

Answer 1

After tax debt = debt rate * (1- tax)

Here, coupon rate = Yield to maturity = 6%, because the market price = face vale

Tax= 35%

After tax debt= 0.06(1-0.35)

= 0.06* 0.65

= 0.039 or 3.9%

So the answer is D.