Answer:
After tax cost of debt is 6.82%
Explanation:
Currently the yield to maturity is the pre-tax cost of debt for Hype company, however the after tax cost of debt considers that the bonds are tax deductible , its actual is less than the pre-tax cost of debt , hence the after-tax cost of debt is shown below
After tax cost of debt=yield to maturity *(1-tax)
after tax cost of debt=11%*(1-0.38)
after tax cost of debt=11%*0.62
after tax cost of debt =6.82%
This confirms that cost of debt is usually lower than cost of equity , where shareholders would want an extra premium to compensate them for the increased risk taken by investing in the business.
