LL Incorporated's currently outstanding 7% coupon bonds have a yield to maturity of 4

Calculation of LL's after tax cost of debt:

The cost of debt is the effective interest rate a company pays on its debts. It’s the cost of debt, such as bonds and loans, among others. The cost of debt often refers to before-tax cost of debt, which is the company's cost of debt before taking taxes into account. However, the difference in the cost of debt before and after taxes lies in the fact that interest expenses are deductible.

The after-tax cost of debt is the interest paid on debt less any income tax savings due to deductible interest expenses. To calculate the after-tax cost of debt, subtract a company's effective tax rate from 1, and multiply the difference by its cost of debt.The cost of debt formula is the effective interest rate multiplied by (1 - tax rate).

For LL' s after tax cost of debt = YTM (1-tax rate)

rD = 4.2 (1-0.25) = 4.2*0.75 = 3.15%