Green Valley Motels has $5 million of debt outstanding with a coupon rate of 8.2%. Currently, the yield to maturity on these bonds is 7.3%. If the firm's tax rate is 34%, what is the after-tax cost of debt to Hill Town Motels?

Question

Quizplus · Accepted Answer

First, we need to find the after-tax cost of debt. This can be calculated using the formula:

After-tax cost of debt = Yield to maturity * (1 - Tax rate)

Plug in the given values:

After-tax cost of debt = 0.073 * (1 - 0.34) = 0.0475 or 4.75%

Therefore, the answer is choice C.

Green Valley Motels Has $5 Million of Debt Outstanding with a Coupon