MAD Corp. has 20-year bonds with an 8% coupon rate and a 10% yield to maturity. What would be MAD's appropriate after-tax cost of debt if their tax rate is 40%? a. 8.0% b. 4.8% c. 6.0% d. 10.0%

After-tax cost of deb = 6%

Explanation:

The cost of debt is the required rate of return payable to investors in the debt instruments of a company. These investors include providers of long term debt finance to the company.

The cost of debt finance can determined by working out the yield to maturity on debt with adjustment for tax.

It is noteworthy that debt finance affords the company  a tax savings advantage because interest expense incurred on the use of debt of are tax deductible expense.

After-tax cost of debt = (1- Tax rate) × before-tax cost of debt

Before tax cost of debt = 10%

Tax rate = 40%

After-tax cost of debt = (1-0.4) × 10% = 6%

After-tax cost of deb = 6%

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