Series 79 practice questionmediumCost of Debt Calculation
If a company issues $100 million of bonds at a yield of 6%, and the corporate tax rate is 25%, what is the company’s after-tax cost of debt?
- A4.50%✓ Correct answer
- B6.00%
- C1.50%
- D4.00%
Explanation
Why A — 4.50%
After-tax cost = 6% × (1 - 0.25) = 4.5%. The other answers ignore the tax shield or use incorrect computations.
Turn it into reps
Reading one answer is not the same as being ready
Lucky the Banker is a free practice app with 995+ Series 79 questions, weak-area tracking, and timed mock exams. No credit card, no paywall.
Spot an error in this question or explanation? Tell us — we fix these fast.
Related Collection, Analysis & Evaluation of Data questions
- A company is considering issuing additional debt. Which of the following is the most likely risk associated with this…
- A company’s EBITDA is $30 million and annual interest expense is $6 million. What is its interest coverage ratio?
- In advising a client considering an acquisition funded 100% by debt, which of the following should an investment banker…
- Which of the following best describes the impact of convertible debt on a company’s capital structure?
- Under FINRA Rule 5110, which of the following must an investment banker consider when advising a public company on a…
- When calculating WACC, why is it preferable to use market values rather than book values for debt and equity?
- Which of the following is a risk of a capital structure with a large proportion of short-term debt relative to…
- According to the Modigliani-Miller theorem with corporate taxes, what is the effect of increasing leverage on a firm’s…