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After-Tax Cost of Debt Calculation

The Heuser Company currently has outstanding bonds with a 10% coupon and 12% yield to maturity. If it issued new bonds at par that provided a similar 12% yield, its after-tax cost of debt would be 7.8% given its 35% marginal tax rate. This is calculated by taking the yield to maturity and multiplying it by 1 minus the tax rate. Tunney Industries can issue perpetual preferred stock at $47.50 per share. The document provides the formula to calculate the after-tax cost of debt but does not show the calculation for the cost of preferred stock.

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Drey Martinez
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7 views1 page

After-Tax Cost of Debt Calculation

The Heuser Company currently has outstanding bonds with a 10% coupon and 12% yield to maturity. If it issued new bonds at par that provided a similar 12% yield, its after-tax cost of debt would be 7.8% given its 35% marginal tax rate. This is calculated by taking the yield to maturity and multiplying it by 1 minus the tax rate. Tunney Industries can issue perpetual preferred stock at $47.50 per share. The document provides the formula to calculate the after-tax cost of debt but does not show the calculation for the cost of preferred stock.

Uploaded by

Drey Martinez
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd

1 AFTER-TAX COST OF DEBT The Heuser Company’s currently outstanding bonds have a

10% coupon and a 12% yield to maturity. Heuser believes it could issue new bonds at par

that would provide a similar yield to maturity. If its marginal tax rate is 35%, what is

Heuser’s after-tax cost of debt?


Cost of Debt = Yield to Maturity x (1 - tax rate)
Cost of Debt = 12% x (1 - 0.35)
Cost of Debt = 7.80%

10-2 COST OF PREFERRED STOCK Tunney Industries can issue perpetual preferred stock at a

price of $47.50 a share. The stock would

cost pf capital

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