Micro Spinoffs, Inc., issued 20-year debt one year ago today at par value with a coupon rate of 9 percent, paid annually. Today, the debt is selling at $1,050. If the firm's tax rate is 34%, what is its after-tax cost of debt?

Question

Quizplus · Accepted Answer

The after-tax cost of debt is the cost of debt to the firm after taking into account the tax savings from the interest payments. The formula for the after-tax cost of debt is:After-tax cost of debt = Coupon rate * (1 - Tax rate)In this case, the coupon rate is 9% and the tax rate is 34%. Therefore, the after-tax cost of debt is:After-tax cost of debt = 9% * (1 - 0.34) = 5.94%Therefore, the correct answer is D) 5.94%.