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 percent,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 = Cost of debt * (1 - Tax rate)In this case, the cost of debt is 9 percent and the tax rate is 34 percent. Therefore, the after-tax cost of debt is:After-tax cost of debt = 9% * (1 - 34%) = 5.94%Therefore, the correct answer is D) 5.94 percent.