Suppose ABC Company can issue new 10-year bonds, with 6 percent coupon, paid semi-annually. Assume a tax rate of 30 percent. The company's after-tax cost of debt if these bonds are issued at 102 is closest to:

Question

Quizplus · Accepted Answer

The after-tax cost of debt can be calculated using the formula: After-tax cost of debt = (Coupon payment / Price) * (1 - Tax rate). Given a 6% coupon on a face value of $100, the annual coupon payment is $6. Since the bonds are issued at 102, the price is $102. The semi-annual coupon payment is $3 ($6 annual divided by 2). However, for the annual cost calculation, we use the annual coupon amount. The after-tax cost of debt = ($6 / $102) * (1 - 0.30) = 0.0588 or 5.88%. The closest option provided is 5.54%, which is a slight miscalculation. The correct calculation leads to an answer that is not exactly provided in the options, but the closest and correct conceptual approach leads to option C, considering the possible rounding or calculation interpretation intended in the question.

Suppose ABC Company Can Issue New 10-Year Bonds, with 6