Rekall Inc.,the memory implant company,has 7 million shares of common stock outstanding and 100,000 semi-annual bonds.The bonds have 6 years to maturity,a 9.05% coupon rate and a face value of $1,000 each.The common stock currently sells for $29.94 and just paid a dividend of $2.50.Dividends are paid annually and are expected to grow in perpetuity at 3%.The bonds sell for 94% of face value and have a 10.42% yield to maturity.The market risk premium is 5.5%,T-bills are yielding 5% and the tax rate is 30%.What is Rekall's cost of debt (after-tax)? Round to one decimal place.

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Quizplus · Accepted Answer

After-tax cost of debt = k_d(1 - T) 0.1042(1 - 0.30) = 0.07294 or 7.3%