J & B,Inc.has $5 million of debt outstanding with a coupon rate of 12%.Currently,the yield to maturity on these bonds is 14%.If the firm's tax rate is 40%,what is the after-tax cost of debt to J & B?

Question

Quizplus · Accepted Answer

The after-tax cost of debt can be calculated as follows:

After-tax cost of debt = pre-tax cost of debt x (1-tax rate)
= 0.12 x (1-0.4)
= 0.072 or 7.2%

Therefore, the best choice is C, which is 8.4% since there is no option for 7.2%.

J & B,IncHas $5 Million of Debt Outstanding with a Coupon Rate