Question

The coupon rate on an issue of debt is 8%. The yield to maturity on this issue is 10%. The corporate tax rate is 21%. What would be the approximate after-tax cost of debt for a new issue of bonds?

Answer 1

The approximate after-tax cost of debt for a new issue of bonds is calculated as follows

After tax cost of debt = Before tax cost of debt x ( 1 - tax rate)

Tax rate = 21%

Before tax cost of debt = 10%

After tax cost of debt = 10% ( 1 - 0.21)

After tax cost of debt = 7.9%