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Optum Corp. has one bond issue oustanding, with a maturity of 10.5 years, a coupon rate...

Optum Corp. has one bond issue oustanding, with a maturity of 10.5 years, a coupon rate of 3.2% and a yield to maturity of 5.9%.

Optum Corp.'s average tax rate is 18% and its marginal tax rate is 31%.

Q 1: What is the (pre-tax) cost of debt?

Q 2: What is the after-tax cost of debt?

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Answer #1

Pre Tax Cost of Debt = YTM

= 5.9%

Post Tax Cost of Debt = YTM (1-Avg Tax rate)

= 5.9% ( 1 - 0.18)

= 5.9% * 0.82

= 4.84%

Pls comment, if any further assistance is required.

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