Dou's Oriental Hotels, Incorporated Sold an Issue of 10-Year Bonds

question 30

Multiple Choice

Dou's Oriental Hotels, Incorporated sold an issue of 10-year bonds. The bonds sold at $995 each. After issuance costs, Dou's Oriental Hotels received $985 each. The maturity value is $1,000 each and the coupon rate is 7 5/8% and paid annually. What is the after-tax cost of debt for these bonds if Dou's Oriental Hotels' marginal tax rate is 40%?

• A)7.70%
• B)4.62%
• C)7.85%
• D)4.71%

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Definitions:

Form 1099-B

This is a tax form used to report proceeds from broker and barter exchange transactions to the IRS, including sales of stocks, bonds, and other securities.

Schedule D

A form used with individual tax returns in the United States to report capital gains and losses from investments.

Section 1231

A tax term in the United States that refers to the treatment of certain property, blending both capital and ordinary tax treatment.

Preferential Rates

Preferential rates refer to lower tax rates applied to certain types of income, such as qualified dividends and long-term capital gains, compared to ordinary income tax rates.