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NEW QUESTION: 1
A firm has just issued 6%, 10-year coupon bonds, which have a yield-to-maturity of 7.1%. The firm has old debt, which pays a coupon of 8%. The firm is in the 45% tax bracket. Its marginal after-tax cost of debt equals ________.
Since debt interest is tax-deductible, the after-tax cost of debt equals 7.1%*(1-45%) = 3.9%. Note that you must use the yield-to-maturity of the new bonds while calculating the cost of debt since this is the rate at which interest expense is computed in maintaining the accounts. The coupon rate does not enter directly in this calculation (though it does matter since it affects the yield-to-maturity).
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