Calculate the after-tax cost of debt for firms with the following yields to maturity for their new bonds. Assume the firm's marginal tax rate is 25.00%.
a. YTM = 6.40%
b. YTM = 7.80%
c. YTM = 9.90%
Repeat parts a-c using a marginal tax rate of 35.00%. What effect does raising the tax rate have on the component cost of debt?

Question

Quizplus · Accepted Answer

The Answer is a. k_d(1 − T) = 6.40(.75) = 4.80%
b. k_d(1 − T) = 7.80(.75) = 5.85%
c. k_d(1 − T) = 9.90(.75) = 7.43%
d. k_d(1 − T) = 6.40(.65) = 4.16%
e. k_d(1 − T) = 7.80(.65) = 5.07%
f. k_d(1 − T) = 9.90(.65) = 6.44%
Raising the tax rate lowers the component cost of debt-the tax break for borrowing money is greater.

Calculate the After-Tax Cost of Debt for Firms with the Following