TC,Inc.has $15 million of outstanding bonds with a coupon rate of 10 percent.The yield to maturity on these bonds is 12.5 percent.If the firm's tax rate is 30 percent,what is relevant cost of debt financing to Kendall,Inc.?

Question

Quizplus · Accepted Answer

The relevant cost of debt financing is the after-tax cost of debt. The formula is: Cost of Debt * (1 - Tax Rate). Here, the yield to maturity (YTM) is the cost of debt, which is 12.5%. So, the after-tax cost is 12.5% * (1 - 0.30) = 8.75%.

TC,IncHas $15 Million of Outstanding Bonds with a Coupon Rate