Question

2 years ago Mickey's Mouse Emporium issued a bond with 20 years to maturity. The bond pays an annual coupon of 6 percent. The bond currently sells for 92 percent of its face value and has a yield to maturity of 6.78%. The company’s tax rate is 40 percent. The book value of the debt issue is $40 million. 132 40000000 In addition, Mickey's Mouse Emporium issued a zero coupon bond that yields 5.52% with 12 years left to maturity; the book value of this bond issue is $40 million, and the bonds sell for 52 percent of par.

What is the company's (after-tax) cost of debt based on the debts' market value? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Cost of debt

%

Answer 1

After tax cost of debt is given as equal to=(40*92%*6.78%+40*52%*5.52%)/(40*92%+40*52%)*(1-40%)=6.325%