Easy Slider Inc. sold a 15-year $1,000 face value bond with a 10% coupon rate. Interest is paid annually. After flotation costs, Easy Slider received $928 per bond. Compute the after-tax cost of debt for these bonds if the firm's marginal tax rate is 40%.

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Quizplus · Accepted Answer

The after-tax cost of debt can be calculated using the formula: After-tax cost of debt = (Coupon payment - Tax savings) / Net proceeds from the bond sale. Here, Coupon payment = 10% of $1,000 = $100, Tax savings = 40% of $100 = $40, Net proceeds = $928. Thus, After-tax cost of debt = ($100 - $40) / $928 = $60 / $928 = 6.4655%, which rounds to approximately 6.6%.