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Terrier Company is in a 40 percent tax bracket and has a bond outstanding that yields 10 percent to maturity
Terrier Company is in a 40 percent tax bracket and has a bond outstanding that yields 10 percent to maturity.
a. What is Terrier's aftertax cost of debt? (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)
Aftertax cost of debt %
b. Assume that the yield on the bond goes down by 1 percentage point, and due to tax reform, the corporate tax rate falls to 25 percent. What is Terrier's new aftertax cost of debt? (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places)
Aftertax cost of debt %
c. Has the aftertax cost of debt gone up or down from part a to part b?
multiple choice
- It has gone up.
- It has gone down.
Expert Solution
a. Computation of After-tax Cost of Debt (Kd):
After-tax Cost of Debt (Kd) = Yield*(1-Tax Rate)
= 10%* (1-0.40)
= 10%* 0.60
After-tax Cost of Debt (Kd) = 6 %
b. Computation of After-tax Cost of Debt (Kd):
After-tax Cost of Debt (Kd) = Yield*(1-Tax Rate)
= 10%* (1-0.25)
= 10%* 0.75
After-tax Cost of Debt (Kd) = 7.50%
c. The after tax cost of debt has gone up.
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