Question

1. The Holmes Company's currently outstanding bonds have a 7% coupon and a 13% 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.

Answer 1

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

= Yield to maturity * (1 - tax rate)

= 13% * (1-0.25)

= 9.75%

Answer 2

SOLUTION :

After tax cost of debt : 

= Pre tax cost of debt * ( 1 - Tax rate in decimals)

= Yield to maturity in percentage * ( 1 - Tax rate in decimals)

= 13 * ( 1 - 0.25)

= 9.75 % (ANSWER)