Asked by Deekshith Rangoju on May 21, 2024
Verified
Alberta Bank's long-term bonds are currently priced to offer a yield-to-maturity of 10.5%.If Alberta Bank's marginal tax rate is 35%,what is the after-tax cost of debt on Alberta Bank's bonds?
A) 7.13%
B) 6.83%
C) 14.18%
D) 9.00%
After-Tax Cost of Debt
The net cost of debt after taking into account the tax deductions available on interest payments.
Yield-to-Maturity
The total return expected on a bond if held until its maturity date, accounting for its current market price, face value, interest rate, and time to maturity.
Marginal Tax Rate
A rephrasing: The portion of tax applied to your income for each additional dollar you earn.
- Comprehend the distinction between pre-tax and post-tax debt costs.
Verified Answer
DB
David BrownMay 22, 2024
Final Answer :
B
Explanation :
The after-tax cost of debt can be calculated as:
After-tax cost of debt = Yield-to-maturity x (1 - Marginal tax rate)
= 10.5% x (1-0.35)
= 6.83%
Therefore, the after-tax cost of debt on Alberta Bank's bonds is 6.83%, which is option B.
After-tax cost of debt = Yield-to-maturity x (1 - Marginal tax rate)
= 10.5% x (1-0.35)
= 6.83%
Therefore, the after-tax cost of debt on Alberta Bank's bonds is 6.83%, which is option B.
Learning Objectives
- Comprehend the distinction between pre-tax and post-tax debt costs.