If a company can issue debt with a yield of maturity of 8 percent, its average tax rate is 33 percent, and its marginal tax rate is 38 percent, the after-tax cost of debt is closest to:

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Quizplus · Accepted Answer

The after-tax cost of debt is calculated using the formula: After-tax cost of debt = Yield of maturity * (1 - Tax rate). Using the marginal tax rate of 38 percent (since it's the rate that will apply to the next dollar of income, and is thus the relevant rate for new debt), the calculation is 8% * (1 - 0.38) = 8% * 0.62 = 4.96%.

If a Company Can Issue Debt with a Yield of Maturity