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dedylja [7]
3 years ago
5

The Heuser Company’s currently outstanding bonds have a 10% coupon and a 12% yield to maturity. Heuser believes it could issue n

ew bonds at par that would provide a similar yield to maturity. If its marginal tax rate is 35%, what is Heuser’s after-tax cost of debt?
Business
1 answer:
liraira [26]3 years ago
7 0

Answer: After-tax cost of debt is 7.8%.

Explanation:

Given that,

coupon = 10% (outstanding bonds)

yield to maturity (YTM) = 12%

marginal tax rate = 35%

The after-tax cost of debt:

After-tax cost of debt = YTM (1 - Tax rate)

= 12% (1 - 0.35)

= 0.12 (0.65)

= 0.078

= 7.8%

YTM is used in the after-tax calculation because it represents the true pre-tax cost of debt to the issuer.

Therefore, the after-tax cost of debt is 7.8%

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