You have been given the following facts and assumptions concerning ABC Corp. at

Question

You have been given the following facts and assumptions concerning ABC Corp. at December 31, 2013. Yield to maturity on long term government bond is 5.00%. Yield to maturity on company long term government bond is 7.0%.Coupon rate on company long term bond is 7.0%.Market price of risk is 8.0% along with estimated company beta value of 1.5.Stock is selling for $40 in the market and 250 million shares are outstanding. Assuming that book value of equity is $5240 million along with book value of interest bearing debt of $1250 million. Existing tax rate stands at 35%.Given all the information estimate ABC Corp's after-tax cost of debt capital. ?

Explanation / Answer

Pre tax cost of debt capital = Yield to maturity on company long term bonds = 7%

After tax cost of debt = Pretax cost of debt * (1 - tax rate) = 7% * (1 - 0.35) = 4.55%

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