Dublin International Corporation's marginal tax rate is 40%.It can issue three-year bonds with a coupon rate of 8.5% and par value of $1,000.The bonds can be sold now at a price of $938.90 each.Determine the appropriate after-tax cost of debt for Dublin International to use in a capital budgeting analysis.

Question

Quizplus · Accepted Answer

The after-tax cost of debt can be calculated using the formula:

After-tax cost of debt = (Coupon rate x (1 - Marginal tax rate)) + ((Par value - Bond price) / Number of years to maturity) / ((Par value + Bond price) / 2)

= (8.5% x (1 - 40%)) + (($1,000 - $938.90) / 3) / (($1,000 + $938.90) / 2)

= 6.6%

Therefore, the appropriate after-tax cost of debt for Dublin International is 6.6%. The answer is C.

Dublin International Corporation's Marginal Tax Rate Is 40