Atlas Inc.has a new bond issue that will net the firm $1,603 500.The bonds have a $1,500,000 par value, pay interest annually at a 6% coupon rate, and mature in 10 years.The firm has a marginal tax rate of 34%.The after-tax cost of the debt issue is

Question

Quizplus · Accepted Answer

Step 1: Calculate the annual interest payment
Annual interest payment = Par value of the bond x Coupon rate
= 1,500,000 x 6%
= $90,000

Step 2: Calculate the after-tax cost of debt
First, calculate the pre-tax cost of debt
Pre-tax cost of debt = Annual interest payment / Net proceeds from the bond issue
= $90,000 / $1,603,500
= 5.618%

Then, calculate the after-tax cost of debt using the formula:
After-tax cost of debt = Pre-tax cost of debt x (1 - Marginal tax rate)
= 5.618% x (1 - 34%)
= 3.708%

Therefore, the after-tax cost of the debt issue is 3.37%. The best choice is B.

Atlas IncHas a New Bond Issue That Will Net the Firm