What is the yield to maturity on Dotte Inc.'s bonds if its after-tax cost of debt is 10% and its tax rate is 35%?

Question

Quizplus · Accepted Answer

The formula for yield to maturity is:
YTM = r + [(FV - PV) / n * PV]
where r = after-tax cost of debt, FV = face value of the bond, PV = current market value of the bond, and n = number of years to maturity.

Since we are given r (10%) and the tax rate (35%), we can use this information to calculate the before-tax cost of debt:
r_BT = r / (1 - tax rate) = 10% / (1 - 0.35) = 15.38%

We are not given any information about the face value or current market value of the bond, so we cannot calculate YTM directly. However, the closest answer choice to our calculated before-tax cost of debt is C (15.38%), so this is the best choice.

What Is the Yield to Maturity on Dotte Inc