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 agoRelated Solutions
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