Author Question: The pre-tax cost of debt for a firm (Read 45 times)

arivle123 · **on:** Apr 25, 2021

Question 1

The outstanding bonds of The Purple Fiddle are priced at $898 and mature in nine years. These bonds have a 6 percent coupon and pay interest annually. The firm's tax rate is 35 percent. What is the firm's after-tax cost of debt?
◦ 4.94 percent
◦ 5.24 percent
◦ 5.30 percent
◦ 7.18 percent
◦ 7.61 percent

Question 2

The pre-tax cost of debt for a firm
◦ is equal to the yield to maturity on the outstanding bonds of the firm.
◦ is equal to the coupon rate of the outstanding bonds of the firm.
◦ is equivalent to the current yield on the outstanding bonds of the firm.
◦ is based on the yield to maturity that existed when the currently outstanding bonds were originally issued.
◦ has to be estimated as it cannot be directly observed in the market.

kjo;oj · **Reply #1 on:** Apr 25, 2021

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