The outstanding bonds of The Purple Fiddle are priced at $898 and mature in nine years. These bonds have a 6 % coupon and pay interest annually. The firm's tax rate is 35 %. What is the firm's after-tax cost of debt?

Question

Quizplus · Accepted Answer

The after-tax cost of debt is calculated using the formula for the yield to maturity (YTM) on a bond, which takes into account the annual interest payment, the face value, the current price, and the number of years until maturity. The after-tax cost of debt is then adjusted for the tax rate. The formula for the after-tax cost of debt is: After-tax cost of debt = YTM * (1 - tax rate). Given the information, the YTM can be approximated or calculated using a financial calculator or software, and then adjusted for the tax rate of 35%. The correct answer, 4.94%, reflects the calculation of the YTM adjusted for the tax benefit of debt.

The Outstanding Bonds of the Purple Fiddle Are Priced at $898