AXYZ Co's. bond has a $1,000 face value and a coupon rate of 6.2% paid annually. The firm's marginal tax rate is 35%. Assuming no flotation costs, what is the after-tax cost of debt for XYZ Co.? 9. Where kdtar =After tax cost of debt ka kahu (1-t) kabe = Before tax cost of debt t Marginal tax rate in decimal format x (1 kdat What would be XYZ Co's. after tax cost of debt if corporate tax rates are reduced by 10% across the board making XYZ Co's. marginal tax rate 25%? kdat x (1-_ Based on these results, does a tax cut make debt more or less preferable than equity financing? Circle your answer LESS PREFERABLE MORE PREFERABLE

Question
AXYZ Co's. bond has a $1,000 face value and a coupon rate of 6.2% paid annually. The firm's marginal
tax rate is 35%. Assuming no flotation costs, what is the after-tax cost of debt for XYZ Co.?
9.
Where
kdtar =After tax cost of debt
ka kahu (1-t)
kabe = Before tax cost of debt
t Marginal tax rate in decimal format
x (1
kdat
What would be XYZ Co's. after tax cost of debt if corporate tax rates are reduced by 10% across the
board making XYZ Co's. marginal tax rate 25%?
kdat
x (1-_
Based on these results, does a tax cut make debt more or less preferable than equity financing? Circle
your answer
LESS PREFERABLE
MORE PREFERABLE

Image Transcription

AXYZ Co's. bond has a $1,000 face value and a coupon rate of 6.2% paid annually. The firm's marginal tax rate is 35%. Assuming no flotation costs, what is the after-tax cost of debt for XYZ Co.? 9. Where kdtar =After tax cost of debt ka kahu (1-t) kabe = Before tax cost of debt t Marginal tax rate in decimal format x (1 kdat What would be XYZ Co's. after tax cost of debt if corporate tax rates are reduced by 10% across the board making XYZ Co's. marginal tax rate 25%? kdat x (1-_ Based on these results, does a tax cut make debt more or less preferable than equity financing? Circle your answer LESS PREFERABLE MORE PREFERABLE

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