Portentious Door Company has outstanding corporate debt paying a 5% semiannual coupon,with a current yield to maturity of 6%.If the firm's tax rate is 15%,what is its effective cost of debt?

Question

Quizplus · Accepted Answer

The effective cost of debt takes into account the tax savings from the interest expense deduction. The calculation is: 
Effective cost of debt = Yield to maturity x (1 - tax rate)
Effective cost of debt = 0.06 x (1 - 0.15)
Effective cost of debt = 0.051 or 5.1%
Therefore, the best choice is C) 5.1%.

Portentious Door Company Has Outstanding Corporate Debt Paying a 5