Tom's Ventures has a zero coupon bond issue outstanding that matures in thirteen years. The bonds are selling at 48 percent of par value. The company's tax rate is 34 percent. What is the
Company's after-tax cost of debt?

Question

Quizplus · Accepted Answer

The after-tax cost of debt is the yield to maturity on the bond multiplied by (1 - the tax rate). In this case, the yield to maturity is 48% / 13 = 3.69%. The after-tax cost of debt is therefore 3.69% * (1 - 0.34) = 3.83%.

Tom's Ventures Has a Zero Coupon Bond Issue Outstanding That