If a corporation has an average tax rate of 40 percent, the approximate annual, after-tax cost of debt for a 10-year, 8 percent, $1,000 par value bond selling at $1,150 is ________.
A) 3.6 percent
B) 4.8 percent
C) 6 percent
D) 8 percent

Question

Quizplus · Accepted Answer

The after-tax cost of debt is the yield to maturity multiplied by (1 - tax rate). In this case, the yield to maturity is 8%, and the tax rate is 40%. Therefore, the after-tax cost of debt is 8% * (1 - 40%) = 4.8%.

If a Corporation Has an Average Tax Rate of 40