The Coupon Rate on an Issue of Debt Is 8

question 10

Multiple Choice

The coupon rate on an issue of debt is 8%. The yield to maturity on this issue is 10%. The corporate tax rate is 31%. What would be the approximate after-tax cost of debt for a new issue of bonds?

• A) 5.28%
• B) 2.48%
• C) 6.90%
• D) 3.14%

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Definitions:

Depreciation

The systematic reduction in the recorded cost of a fixed asset over its useful life.

Quick Ratio

A financial metric that measures a company's ability to meet its short-term obligations with its most liquid assets; also known as the acid-test ratio.

Current Assets

Assets that are expected to be converted into cash or used up within one year or one business cycle, whichever is longer.

Current Liabilities

Short-term financial obligations due within one year, such as accounts payable and short-term loans.