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15 May, 05:33

The Holmes Company's currently outstanding bonds have a 9% coupon and a 12% yield to maturity. Holmes believes it could issue new bonds at par that would provide a similar yield to maturity. If its marginal tax rate is 40%, what is Holmes's after-tax cost of debt? Round your answer to two decimal places.

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  1. 15 May, 08:13
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    7.20%

    Explanation:

    Given that

    Coupon rate = 9%

    Yield to maturity = 12%

    And marginal tax rate is 40%

    So by considering the above information, the after tax cost of debts is

    = Yield to maturity * (1 - tax rate)

    = 12% * (1 - 0.40)

    = 7.20%

    After considering the tax rate and then multiplying with the yield to maturity we can get the after tax cost of debt

    We ignored the coupon rate
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