ADK has 30,000 15-year, 9 percent annual coupon bonds outstanding. If the bonds currently sell for 111 percent of par and the firm pays an average tax rate of 21 percent, what will be the before-tax and after-tax component cost of debt?

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The before-tax cost of debt can be calculated using the yield to maturity (YTM) formula, which takes into account the current price of the bond, the par value, the coupon rate, and the time to maturity. Given that the bonds sell for 111 percent of par, the annual coupon is 9 percent of $1,000 (par value) = $90, and there are 15 years to maturity, the YTM (before-tax cost of debt) can be approximated or calculated using a financial calculator or software to find a rate that equates the present value of the bond's cash flows to its current price. The after-tax cost of debt is then calculated by adjusting the before-tax cost of debt for the tax rate, which is 21 percent in this case. The correct before-tax cost of debt is approximately 7.74 percent, and the after-tax cost of debt is approximately 6.11 percent when accounting for the tax shield (1 - tax rate) on the interest payments.

ADK Has 30,000 15-Year, 9 Percent Annual Coupon Bonds Outstanding