Alishas Travel Tours expects to sell a new bond issue at its par value. The coupon rate is 10 7/8%. Because issuance costs are so small, Alishas plans to ignore the impact of issuance costs on the after-tax cost. What is the after-tax cost of these bonds if Alishas' marginal tax rate is 40%?

Question

Quizplus · Accepted Answer

The after-tax cost of debt can be calculated as follows:

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

The pre-tax cost of debt is equal to the coupon rate of 10 7/8%, which can be expressed as 10.875%.

Therefore, the after-tax cost of debt = 10.875% x (1-40%) = 6.53%.

Thus, the correct answer is C.

Alishas Travel Tours Expects to Sell a New Bond Issue