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 %.

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 %