The George Company, Inc., has two issues of debt. Issue A has a maturity value o

Question

The George Company, Inc., has two issues of debt. Issue A has a maturity value of 8 million dollars, a coupon rate of 8%, paid annually, and is selling at par. Issue B was issued as a 15 year bond 5 years ago. Its coupon rate is 9%, paid annually. Investors demand a pre-tax return of 9.3% on this bond. The maturity value of Issue B is 6 million dollars. The George company has a marginal tax rate of 35%. What is the company's after tax cost of debt?
A) 4.73%
B) 5.56%
C) 7.36%
D) 8.47%
please show the work

Explanation / Answer

The after-tax cost of debt refers to how much money debt really costs after taking into consideration the tax benefits offered for certain types of debt. For example, the Internal Revenue Service allows you to deduct mortgage interest as a deduction, and investment interest can be used to offset your investment income. These tax deductions reduce the cost of the debt. To determine how much the debt truly costs, you need to know which tax bracket you're in and how much interest you can deduct

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