Apple's 9% annual coupon bond has 10 years until maturity and the bonds are selling in the market for $890. The firm's tax rate is 36%. What is the firm's after-tax cost of debt?

Question

Quizplus · Accepted Answer

The first step is to calculate the before-tax cost of debt:

Coupon payment = 9% x $1,000 = $90
Market price of bond = $890
Face value of bond = $1,000

Yield-to-maturity (YTM) can be calculated using a financial calculator or Excel. In this case, assuming semi-annual payments, YTM is 5.22%.

Before-tax cost of debt = YTM = 5.22%

Next, we need to calculate the after-tax cost of debt:

Tax rate = 36%

After-tax cost of debt = Before-tax cost of debt x (1 - Tax rate)

After-tax cost of debt = 5.22% x (1 - 0.36)
After-tax cost of debt = 3.34%

Therefore, the answer is D) 6.95%.

Apple's 9% Annual Coupon Bond Has 10 Years Until Maturity