Omega 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 Omega use as an after-tax cost of debt for cost of capital purposes?

Question

Quizplus · Accepted Answer

The after-tax cost of debt is calculated by finding the yield to maturity (YTM) on the bond and then adjusting for taxes. The YTM is approximately 8.08% (annual), and the after-tax cost is 8.08% * (1 - 0.40) = 4.85%.

Omega Has an Outstanding Bond Issue That Has a 7