Baron Corporation has a target capital structure of 60 percent common stock, 5 percent preferred stock, and 35 percent debt

Finance Aug 23, 2020

Baron Corporation has a target capital structure of 60 percent common stock, 5 percent preferred stock, and 35 percent debt. Its cost of equity is 12 percent, the cost of preferred stock is 8 percent, and the pretax cost of debt is 9 percent. The relevant tax rate is 24 percent.

b.What is the aftertax cost of debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Expert Solution

Computation of the after tax cost of debt:-

After tax cost of debt = Pretax cost of debt * (1 - Tax rate)

= 9% * (1 - 24%)

= 6.84%

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