Bonds issued last year by Gowen Inc. carried a coupon rate of 7%. Bonds issued today by Gowen Inc. would carry a coupon rate of 9%. Assume a corporate tax rate of 40%. What is the after tax cost of debt?

Question

Quizplus · Accepted Answer

The after-tax cost of debt is calculated as the coupon rate times (1 - tax rate). Therefore, for bonds issued today by Gowen Inc., the after-tax cost of debt is 9% * (1 - 0.40) = 9% * 0.60 = 5.4%.

Bonds Issued Last Year by Gowen Inc