Decline Inc. is trying to determine its cost of debt. The firm has a debt issue outstanding with 13 years to maturity that is quoted at 105.2 percent of face value. The issue makes semiannual payments and has an embedded cost of 6 percent annually. What is the aftertax cost of debt if the tax rate is 21 percent?
A) 4.30 percent
B) 4.92 percent
C) 4.17 percent
D) 5.43 percent
E) 5.58 percent

Question

Quizplus · Accepted Answer

The aftertax cost of debt is 4.30 percent. This is calculated as follows:Aftertax cost of debt = Embedded cost of debt * (1 - Tax rate)= 6% * (1 - 21%)= 6% * 0.79= 4.30%