Alpha has an outstanding bond issue that has a 7.75% semiannual coupon, a current maturity of 20 years, and sells for $967.97. The firm's income tax rate is 40%. What should Alpha use as an after-tax cost of debt for cost of capital purposes?

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The after-tax cost of debt is calculated using the formula: After-tax cost of debt = Yield to Maturity (YTM) * (1 - Tax Rate). First, calculate the YTM using the bond's price, coupon rate, and maturity. The bond's annual coupon payment is $77.50 (7.75% of $1,000), and the bond sells for $967.97. Using a financial calculator or YTM formula, the YTM is approximately 8.08%. The after-tax cost of debt is 8.08% * (1 - 0.40) = 4.85%.

Alpha Has an Outstanding Bond Issue That Has a 7