Before-tax cost of debt and after-tax cost of debt

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Cost of Debt

The _________________ (before-tax cost of debt, after-tax cost of debt) is the interest rate that a firm pays on any new debt financing.

Revive Co. can borrow at any interest rate of 12.5% for a period of eight years. its marginal federal-plus state tax rate is 30%. What is Revive's after-tax cost of debt?

a. 7.5%

b. 8.8%

c. 12.5%

d. 8.4%

Revive Co. has outstanding 5-year no callable bonds with a face value of \$1,000. These bonds have a current market price of \$1,229.24 and an annual coupon rate of 10%. The company faces a tax rate of 30%. If the company wants to issue new debt, what would be a reasonable estimate for its after-tax cost of debt?

a. 3.32%

b. 3.82%

c. 3.98%

d. 2.99%

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