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Before and after tax cost of debt

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Assume that Dell issued 30-year bonds, 8% coupon rate, semiannual, 7 years ago. The bond currently sells for 108% of face value. The company's tax rate is 35%.

1. What is the pretax cost of debt?
2. What is the after-tax cost of debt?
3. Which is more important and why?

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Solution Summary

The solution explains how to calculate the before and after tax cost of debt and which is more important

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1. The pretax cost is the YTM on the existing bonds. The YTM is the discounting rate that will make the present value of interest and ...

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