The outstanding debt of Billabong has five years to maturity, a current yield of 6%, and a price of $95. What is the pretax cost of debt if the tax rate is 30%?

Question

Quizplus · Accepted Answer

To calculate the pretax cost of debt, we need to use the formula:

Pretax Cost of Debt = Current Yield * (1 - Tax Rate)

Substituting the given values, we get:

Pretax Cost of Debt = 6% * (1 - 0.30)
Pretax Cost of Debt = 4.2%

Therefore, the answer is choice B, 6.9%.

The Outstanding Debt of Billabong Has Five Years to Maturity