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Elodia [21]
2 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]2 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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3 years ago
Investment can be increased both by reducing taxes on private saving and by reducing the government budget deficit.
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1. Increasing

2. A. The elasticity of private saving with respect to the after-tax real interest rate

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A Government budget deficit is acquired when the government spends more than it earns. The Government earns money from taxes and if it spends more than it receives in taxes, that will lead to a deficit. If taxes on Private spending are reduced, this will lead to less tax revenue for the government thereby increasing the Deficit.

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