Jay's Bakery has a bond issue outstanding that matures in eight years. The bonds pay interest semiannually. Currently, the bonds are quoted at 97.8 percent of face value and carry a coupon rate of 5.7 percent. What is the aftertax cost of debt if the tax rate is 21 percent?
A) 4.88 percent
B) 4.16 percent
C) 5.87 percent
D) 4.78 percent
E) 6.05 percent

Question

Quizplus · Accepted Answer

The aftertax cost of debt can be calculated using the formula: Aftertax cost of debt = Yield to Maturity (YTM) * (1 - Tax Rate). The YTM can be approximated since the bond is selling at a discount (97.8% of face value), has 8 years to maturity, and pays a semiannual coupon of 5.7%. The approximation would consider these factors, but without the exact calculation or YTM provided, we can infer that the correct answer accounts for the tax shield on the interest expense. Given the options, the closest and most plausible calculation reflecting the aftertax cost of debt, considering a 21% tax rate, is option D, 4.78 percent. This reflects the reduced cost of debt after accounting for the benefit of tax deductibility of interest expenses.

Jay's Bakery Has a Bond Issue Outstanding That Matures in Eight