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4 September, 19:29

Laurel, Inc., has debt outstanding with a coupon rate of 5.9 % and a yield to maturity of 7.2 %. Its tax rate is 38 %. What is Laurel's effective (after-tax) cost of debt? NOTE: Assume that the debt has annual coupons. Note: Assume that the firm will always be able to utilize its full interest tax shield. The effective after-tax cost of debt is nothing %.

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  1. 4 September, 20:51
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    effective (after-tax) cost of debt = 4.464 %

    Explanation:

    given data

    coupon rate = 5.9 %

    yield to maturity = 7.2 %

    tax rate = 38 %

    to find out

    effective (after-tax) cost of debt

    solution

    we get here effective (after-tax) cost of debt that is express as

    effective (after-tax) cost of debt = Yield to maturity * (1 - Tax rate) ... 1

    put here value we get

    effective (after-tax) cost of debt = 7.2% * (1 - 38 %)

    effective (after-tax) cost of debt = 0.072 * (1 - 0.38)

    effective (after-tax) cost of debt = 0.072 * 0.62

    effective (after-tax) cost of debt = 0.04464

    effective (after-tax) cost of debt = 4.464 %
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