The outstanding debt of Billabong has 10 years to maturity, a current yield of 7%, and a price of $95. What is the pre-tax cost of debt if the tax rate is 30%?

Question

Quizplus · Accepted Answer

The pre-tax cost of debt can be calculated using the following formula:

Pre-tax cost of debt = current yield x (1 - tax rate)

Substituting the given values, we get:

Pre-tax cost of debt = 7% x (1 - 30%)
Pre-tax cost of debt = 7% x 0.7
Pre-tax cost of debt = 4.9%

Therefore, the pre-tax cost of debt is 4.9%. Therefore, the best choice is D.

The Outstanding Debt of Billabong Has 10 Years to Maturity