ADK has 30,000 15-year 9% semi-annual coupon bonds outstanding. If the bonds currently sell for 90% of par and the firm pays an average tax rate of 32%, what will be the before-tax and after-tax component cost of debt?

Question

Quizplus · Accepted Answer

- Before-tax component cost of debt = coupon rate x (1 - tax rate) = 9% x (1 - 0.32) = 6.12%
- After-tax component cost of debt = coupon rate x (1 - tax rate) x (1 - discount rate) + (discount rate) = 9% x (1 - 0.32) x (1 - 0.9) + (0.9) = 7.02%
- Therefore, the answer is B, with a before-tax component cost of debt of 10.32% and an after-tax component cost of debt of 7.02%.

ADK Has 30,000 15-Year 9% Semi-Annual Coupon Bonds Outstanding