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# Cost of borrowing: Calculate the after-tax cost of debt

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C1. (Cost of borrowing) A firm issues a 10-year debt obligation that bears a 12% coupon rate and gives the investor the right to put the bond back to the issuer at the end of the fifth year at 103% of its face amount. The issue has no sinking fund. Interest is paid semiannually. The issuer's tax rate is 34%.

a. Calculate the after-tax cost of debt, assuming the debt remains outstanding until maturity.
b. Calculate the after-tax cost of debt, assuming investors put the bond back to the firm at the end of the fifth year. (Note: Any unamortized issuance expenses and any redemption premium can be deducted for tax purposes in the year of redemption).

#### Solution Preview

a .The after tax cost of debt = Coupon rate * (1 - tax rate)

= 12% * (1 - ...

#### Solution Summary

The solution calculate the after-tax cost of debt.

\$2.49