Question

Suppose you are trying to estimate the after tax cost of debt for a firm as part of the calculation of the Weighted Average Cost of Capital (WACC). The corporate tax rate for this firm is 32%. The firm's bonds pay interest semiannually with a 6.9% coupon rate and have a maturity of 14 years. If the annual yield to maturity of the bonds is 6.61%, what is the after tax cost of debt for this firm? (Answer to the nearest hundredth of a percent, e.g. 12.34%, but do not use a percent sign).

Answer 1

Information provided:

Yield to maturity= 6.61%

Tax rate= 32%

After tax cost of debt= before tax cost of debt*(1 – tax rate)

                                        = 6.61%*(1 – 0.32)

                                        = 4.49.

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