Hi Tech Products has 35,000 bonds outstanding that are currently quoted at 102.3. The bonds mature in 11 years and carry a 9 percent annual coupon.
What is the firm’s after-tax cost of debt if the applicable tax rate is 35%?

A) 4.47% B) 4.79% C) 5.63% D) 5.98% E) 6.31%

We know the price of the bond is $102.3, its future value or par value is $100, the number of periods are 11 as it is annual coupon bond with a maturity of 11 years and the coupon payment each year is (0.09*100)= $9. We can input these values in a financial calculator to find the bonds ytm or cost of debt.

PV= 102.3

FV= -100

PMT=-9

N= 11

Compute I = 8.66

The pretax cost of debt is 8.66%

Now in order to calculate the after tax cost of debt we will use the formula

Pretax cost of debt *(1-tax rate)

=0.0866*(1-0.35)=0.05629= 5.629% rounded of to 5.63%

Hi Tech Products has 35,000 bonds outstanding that are currently quoted at 102.3. The bonds mature in 11 years and carry a 9 percent annual coupon. What is the firm’s after-tax cost of debt if the applicable tax rate is 35%? A) 4.47% B) 4.79% C) 5.63% D) 5.98% E) 6.31%

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Hi Tech Products has 35,000 bonds outstanding that are currently quoted at 102.3. The bonds mature in 11 years and carry a 9 percent annual coupon.
What is the firm’s after-tax cost of debt if the applicable tax rate is 35%?

A) 4.47% B) 4.79% C) 5.63% D) 5.98% E) 6.31%