The coupon rate on an issue of debt is 8%. The yield to maturity on this issue is 10%. The corporate tax rate is 31%. What would be the approximate after-tax cost of debt for a new issue of bonds?
A) 5.28%
B) 2.48%
C) 6.90%
D) 3.14%

Question

Quizplus · Accepted Answer

The after-tax cost of debt can be calculated using the formula:
After-tax cost of debt = Yield to maturity x (1 - Corporate tax rate)
= 10% x (1 - 0.31)
= 6.9%
Therefore, the approximate after-tax cost of debt would be 6.9%. Option C is the correct answer.

The Coupon Rate on an Issue of Debt Is 8