Question

The dollar cost of debt for Coval​ Consulting, a U.S. research​ firm, is 7.3%.

The firm faces a tax rate of 37% on all​ income, no matter where it is earned. Managers in the firm need to know its yen cost of debt because they are considering a new bond issue in Tokyo to raise money for a new investment there. The​ risk-free interest rates on dollars and yen are

r Subscript $ Baseline equals r$=5%

and r Subscript yen Baseline equals r¥=1.4%

respectively. Coval Consulting is willing to assume that capital markets are internationally integrated and that its free cash flows are uncorrelated with the​ yen-dollar spot rate. What is Coval​ Consulting's after-tax cost of debt in​ yen? ​(Hint: Start by finding the​ after-tax cost of debt in dollars and then finding the yen​ equivalent.)

The​ after-tax cost of debt in dollars is _____________%. (Round to two decimal​ places.)

Answer 1

After tax cost of Debt in $ = COst of debt (1-tax rate)

                  = 7.3(1-.37)

                  = 7.3 * .63

                   = 4.599%   [rOUNDED to 4.60%)

Spot Rate (yen per $)= 1.4 /5 = .28

After-tax cost of debt in​ yen :Spot rate * After tax cost of dollars in $

                              = .28* 4.60

                               = 1.288 % [rounded to 1.29%]