Baxter International Inc. can obtain funds for future investments through retained earnings, new issues of common stock, and issuance of debt. Baxter's stock currently sells for $18 per share, paid a dividend of $1.20 last year (D0=$1.20), has a growth rate of 6% that is expected to continue, and new issues carry flotation costs of7%. Baxter's bonds sell for $945, pays a 7% annual coupon, matures in 30 years, and new issues carry3% flotation costs. Baxter's tax rate is 30%.9. What is Baxter's after-tax cost of debt

The multiple choices are:

a. 7.72%

b. 5.40%

c. 5.22%

d. 7.46%

e. 4.90%

Option B is the correct answer, 5.40%

Explanation:

In order to determine the after tax cost of Baxter's debt, we need to first of all calculate the pretax cost of debt which is by applying the rate formula in excel.

=rate (nper, pmt,-pv, fv)

nper is the number of coupon payments the bond would make which is 30

pmt is the annual coupon interest on the bond=7%*$1000=$70

pv is the current price of the bond minus the flotation cost=$945 * (1-3%) = $916.65

The fv is the face value of $1000 per bond

=rate (30,70,-916.65,1000)

pretax cost of debt=rate=7.72%

After tax cost of debt=pretax cost of debt * (1-t)

t is th tax rate of 30% 0or 0.30

after tax cost of debt=7.72% * (1-.3) = 5.40%