If a corporation has an average tax rate of 40 percent, the approximate, annual, aftertax cost of debtfor a 15-year, 12 percent, $1,000 par value bond, selling at $950 is
A) 6.0 percent.
B) 10 percent.
C) 10.6 percent.
D) 7.6 percent.

Question

Quizplus · Accepted Answer

The after-tax cost of debt is calculated by multiplying the yield to maturity (YTM) by (1 - tax rate). The YTM for a bond selling at $950 with a 12% coupon rate and $1,000 par value is approximately 12.6%. The after-tax cost is 12.6% * (1 - 0.40) = 7.56%, which is approximately 7.6%.

If a Corporation Has an Average Tax Rate of 40