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26 March, 18:12

The Holmes Company's currently outstanding bonds have a 9% coupon and a 14% yield to maturity. Holmes believes it could issue new bonds at par that would provide a similar yield to maturity. If its marginal tax rate is 25%, what is Holmes' after-tax cost of debt

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  1. 26 March, 18:37
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    10.5%

    Explanation:

    Holmes company currently have an outstanding bond of 9% coupon

    They also have a 14% yield to maturity

    = 14/100

    = 0.14

    The marginal tax rate is 25%

    = 25/100

    = 0.25

    The after-tax cost of debt can be calculated as follows

    After tax-cost of debt = Yield to maturity * (1-tax rate)

    = 0.14 * (1-0.25)

    = 0.14*0.75

    = 0.105*100

    = 10.5%

    Hence the after-tax cost of debt for Holmes company is 10.5%
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