The outstanding debt of Billabong has eight years to maturity, a current yield of 8%, and a price of $95. What is the pretax cost of debt if the tax rate is 30%?

Question

Quizplus · Accepted Answer

The formula for calculating the pretax cost of debt is: 
pretax cost of debt = current yield * (1 - tax rate)
Substituting the given values, we get: 
pretax cost of debt = 8% * (1 - 0.30) = 5.6%
Therefore, the pretax cost of debt is 5.6%, which is closest to option B (8.5%).

The Outstanding Debt of Billabong Has Eight Years to Maturity