Question

LL Incorporated’s currently outstanding 7 percent coupon bonds have a yield to maturity of 6 percent. LL believes it could sell new bonds that would provide a similar yield to maturity. If its marginal tax rate is 30 percent, what is LL’s after-tax cost of debt? Express your answer in percentage (without the % sign) and round it to two decimal places.

Answer 1

Answer:

4.2%

Step-by-step explanation:

Data provided in the question:

yield to maturity of coupon bonds = 6 percent = 0.06

marginal tax rate = 30 percent = 0.3

Now,

The LL’s after-tax cost of debt is calculated using the formula

= yield to maturity × ( 1 - marginal tax rate )

on substituting the respective values, we get

= 0.06 × ( 1 - 0.30 )

or

= 0.06 × 0.7

or

= 0.042

or

= 0.042 × 100%

= 4.2%