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The Holmes Company's currently outstanding bonds have a 10% coupon and a 10% 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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abiolataiwo2015

Answer:

7.5%

Explanation:

Calculation to determine what is Holmes' after-tax cost of debt

Using this formula

After-tax cost of debt=YTM (1-Taxes)

Where,

YTM = 10%

Tax Rate = 25%

Let plug in the formula

After-tax cost of debt= 10%(1-25%)

After-tax cost of debt=10%(75%)

After-tax cost of debt=0.075*100

After-tax cost of debt=7.5%

Therefore Holmes' after-tax cost of debt is 7.5%

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