Question

Oriole Ltd. has issued bonds that never require the principal amount to be repaid to investors. Correspondingly, Oriole must make interest payments into the infinite future. If the bondholders receive annual payments of $95 and the current price of the bonds is $1,000.00. What is the pre-tax cost of this debt? (Round answer to 2 decimal places, e.g. 15.25%.) Pre-tax cost of debt % What is the after-tax cost of this debt for Oriole if the firm is in the 40 percent marginal tax rate? (Round intermediate calculations to 4 decimal places, e.g. 1.2514 and final answer to 2 decimal places, e.g. 15.25%.) After-tax cost of debt0

Answer 1

What is the pre-tax cost of this debt?
=95/1000=9.50%

What is the after-tax cost of this debt for Oriole if the firm is in the 40 percent marginal tax rate?
=9.50%*(1-40%)
=5.70000%