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3 January, 09:02

Hi Tech Products has 35,000 bonds outstanding that are currently quoted at 102.3. The bonds mature in 11 years and carry a 9 percent annual coupon. What is the firm's aftertax cost of debt if the applicable tax rate is 35 percent?

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  1. 3 January, 12:52
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    aftertax cost of debt = 5.63%

    Explanation:

    fisrt we need to know the formula for the yield to maturity

    Yield to maturity (YTM)

    YTM = (I + (F-P) / n) / (0.6P + 0.4F)

    YTM = (9 + (100-102.3) / 11) / (0.6*102.3 + 0.4*100)

    YTM = 0.0867

    YTM = 8.67%

    after taxes we have ...

    8.67% (1-0.35%)

    =0.0563

    =5.63%
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