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Pepci co. is issuing a $1,000 par value bond that pays 7 percent annual coupon and...

Pepci co. is issuing a $1,000 par value bond that pays 7 percent annual coupon and mature in 15 years. Investors are expected to pay $925 for the bond. The company is in a 40 percent tax bracket. What will be the firm’s after tax cost of debt?

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Answer #1

After tax cost of debt = Coupon rate(1 - Tax rate)

After tax cost of debt = 0.07(1 - 0.40)

After tax cost of debt = 0.042 or 4.2%

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