The Holmes Company's currently outstanding bonds have a 7% coupon and a 14% yield to maturity. Holmes believes it could issue new bonds at par that would provide a similar yield to maturity. If its marginal tax rate is 25%, what is Holmes' after-tax cost of debt? Round your answer to two decimal places.
% ?
After tax cost of debt = Yield to maturity * ( 1-tax rate)
= 14% * ( 1- 25%)
= 10.50%
Hence the correct answer is 10.50%
SOLUTION :
After tax cost of debt, rD :
= Pre tax cost of debt * ( 1 - Tax rate in decimals)
= Yield to maturity in percentage * ( 1 - Tax rate in decimals)
= 14 * ( 1 - 0.25)
= 10.50 % (ANSWER)\
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