Suppose company ABC 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 95, is closest to:

Question

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The after-tax cost of debt can be calculated using the formula for the yield to maturity (YTM) on a bond, adjusted for taxes. Since the bond is issued at a discount (95 per $100 of face value), its yield will be higher than the coupon rate. The after-tax cost of debt is the YTM multiplied by (1 - tax rate). Without calculating the exact YTM, we know it must be higher than the coupon rate of 6% because the bond is issued at a discount. After adjusting for a 30% tax rate, the cost must be less than 6% but significantly higher than the other options provided, making 5.04% (C) the closest and most plausible choice.

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