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Elodia [21]
3 years ago
9

The Holmes Company's currently outstanding bonds have a 8% coupon and a 13% yield to maturity. Holmes believes it could issue ne

w bonds at par that would provide a similar yield to maturity. If its marginal tax rate is 35%, what is Holmes's after-tax cost of debt?
Business
1 answer:
Marina86 [1]3 years ago
7 0

Answer: 8.45%

Explanation:

From the question, we are informed that Holmes Company's currently has an outstanding bonds and has a 8% coupon and a 13% yield to maturity.

We are further told that Holmes believes it could issue new bonds at par that would provide a similar yield to maturity and that its marginal tax rate is 35%.

Holmes's after-tax cost of debt will therefore be calculated as:

= Yield to maturity × (1 - Marginal tax rate)

= 13% × (1 - 35%)

= 13% × (65%)

= 0.13 × 0.65

= 0.0845

= 8.45%

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