LL Incorporated’s currently outstanding 11% coupon bonds have a yield to maturity of 8%. LL believes it could?
LL Incorporated’s currently outstanding 11% coupon bonds have a yield to maturity of 8%. LL 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 LL’s after-tax cost of debt?
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LL's "marginal" debt rate (rd = rate debt) = 8% (it believes it can issue new debt at par at this rate)
After Tax cost of debt = rd * (1- tx rate)
0.08 * (1 - 0.35)
= 0.08 * (0.65)
= 0.052 or 5.2%
Hope this helps..