Question

In: Finance

Terrier Company is in a 40 percent tax bracket and has a bondoutstanding that yields...

Terrier Company is in a 40 percent tax bracket and has a bond outstanding that yields 10 percent to maturity.

a. What is Terrier’s aftertax cost of debt?(Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)
  


b. Assume that the yield on the bond goes down by 1 percentage point, and due to tax reform, the corporate tax rate falls to 25 percent. What is Terrier’s new aftertax cost of debt? (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)
  


c. Has the aftertax cost of debt gone up or down from part a to part b?
  


It has gone up

It has gone down

Solutions

Expert Solution

a.After tax cost of debt = Before tax cost of debt*(1 - tax rate)

= 10%*(1 - 0.40)

= 6%

b.New after tax cost of debt = 10% - 1% = 9%

New after tax cost of debt = Before tax cost of debt*(1 - tax rate)

= 9%*(1 - 0.40)

= 5.4%.

c.The after tax cost of debt has gone down.

jeff jeffy answered 2 years ago
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