Question: Simple Corp. has one bond issue oustanding, with a maturity of 10.5 years, a coupon rate of 3.4% and a yield to maturity of 4.7%.

Simple Corp. has one bond issue oustanding, with a maturity of 10.5 years, a coupon rate of 3.4% and a yield to maturity of 4.7%.

Simple Corp.'s average tax rate is 18% and its marginal tax rate is 28%.

1.

What is the (pre-tax) cost of debt?

Correct

The pre-tax cost of debt equals the yield to maturity on a bond, or 0.047 in this case

2. What is the after-tax cost of debt?

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