Tom's Ventures has a zero coupon bond issue outstanding that matures in thirteen years. The bonds are selling at 48 % of par value. The company's tax rate is 34 %. 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 multiplied by (1 - tax rate). In this case, the yield to maturity is 48% / 13 = 3.69%. The after-tax cost of debt is 3.69% * (1 - 0.34) = 3.83%.

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