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Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

AFTER-TAX COST OF DEBT The Heuser Company’s currently outstanding bonds have a 10% coupon and a 12% yield to maturity. Heuser believes it could issue new bonds at par that would provide a similar yield to maturity. If its marginal tax rate is 35%. what is Heuser’s after-tax cost of debt?

Summary Introduction

To identify: The after-tax cost of debt.

After-Tax Cost of Debt:

It can be defined as relevant cost of new debt considering tax deductibility in interest. It is the cost of debt after tax savings. The interest on the debt is tax deductible. The tax can be saved on the interest paid on the debt. It is used to calculate the weighted average cost of capital.

Explanation

Given,

Before-tax cost of debt is 10%.

Tax rate is 40%.

The formula to calculate after-tax cost of debt is,

After-Tax Cost of Debt=rd(1t)

Where,

  • rd is the interest on new debt.
  • t is the tax rate.

Substitute 10% for rd and 0

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