Turner Cement Products has a bond issue outstanding that matures in 12 years. The bonds pay interest semi-annually. Currently, the bonds are quoted at 102.5 % of face value and carry an 8.5 % coupon. The firm's tax rate is 35 %. What is Turner's after-tax cost of debt?

Question

Quizplus · Accepted Answer

The after-tax cost of debt can be calculated using the formula for the yield to maturity (YTM) on a bond, which takes into account the current price, the face value, the coupon rate, and the time to maturity. However, since the exact YTM calculation requires a financial calculator or solving a polynomial equation, we'll focus on the conceptual understanding that the after-tax cost of debt is the YTM adjusted for the tax rate. Given the bond is quoted at 102.5% of its face value, has an 8.5% coupon rate, and considering the tax rate of 35%, the after-tax cost of debt would be lower than the coupon rate due to the tax shield on interest payments. The correct answer (B) 5.31% is the closest approximation to what the after-tax cost of debt would be, considering these factors.

Turner Cement Products Has a Bond Issue Outstanding That Matures