Hi Tech Products has 35,000 bonds outstanding that are currently quoted at 102.3. The bonds mature in 11 years and carry a 9 percent annual coupon. What is the firm's aftertax cost of debt if the applicable tax rate is 35 percent?

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Quizplus · Accepted Answer

The aftertax cost of debt is calculated using the formula: Aftertax cost of debt = (Annual coupon payment / Current bond price) * (1 - Tax rate). The annual coupon payment is 9% of the face value (assumed to be $1,000), so $90. The current bond price is 102.3% of the face value, so $1,023. The aftertax cost of debt is ($90 / $1,023) * (1 - 0.35) = 5.63%.

Hi Tech Products Has 35,000 Bonds Outstanding That Are Currently