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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).

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    https://brainmass.com/business/interest-rates/cost-borrowing-calculate-after-tax-cost-debt-354318

    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.

    $2.19