If a corporation faces a tax rate of 21 percent,the after-tax cost of debt for a 15-year,12 percent,$1,000 par value bond,selling at $950 is ________.

Question

Quizplus · Accepted Answer

The first step in calculating the after-tax cost of debt is to determine the annual interest payment by multiplying the coupon rate by the par value of the bond: 
$1,000 x 0.12 = $120

Next, we need to calculate the pre-tax cost of debt, which is the yield to maturity of the bond. We can use a financial calculator or spreadsheet function to find that the yield to maturity is approximately 13.47 percent.

Then, we can calculate the after-tax cost of debt using the following formula:

After-Tax Cost of Debt = Pre-Tax Cost of Debt x (1 - Tax Rate)

After-Tax Cost of Debt = 0.1347 x (1 - 0.21) = 0.10608 or 10.61 percent

Therefore, choice C is the best answer.

If a Corporation Faces a Tax Rate of 21 Percent,the