Question: You have been assigned the task of estimating the after tax
You have been assigned the task of estimating the after-tax cost of debt for a firm as part of the process in determining the firm’s cost of capital. After doing some checking, you find out that the firm’s original 20-year 9.5% coupon bonds (paid semi-annually), currently have 14 years until they mature and are selling at a price of $1,100 each. You are also told that the investment bankers charge a commission of $25 per bond when new bonds are sold. If these bonds are the only debt outstanding for the firm, what is the after-tax cost of debt for this firm if the marginal tax rate for the firm is 34 percent?
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