After-tax Cost of Debt The Heuser Company\'s currently outstanding bonds have a
ID: 2636547 • Letter: A
Question
After-tax Cost of Debt
The Heuser Company's currently outstanding bonds have a 7% coupon and a 13% yield to maturity. Heuser believes it could issue new bonds at par that would provide a similar yield to maturity. If its marginal tax rate is 35%, what is Heuser's after-tax cost of debt? Round your answer to two decimal places.
%
Cost of Preferred Stock
Tunney Industries can issue perpetual preferred stock at a price of $53.00 a share. The stock would pay a constant annual dividend of $5.00 a share. What is the company's cost of preferred stock, rp? Round your answer to two decimal places.
%
Explanation / Answer
Coupon rate = 7%
MArginal tax rate = 35%
After tax cost of debt = Before tax cost of debt x(1-tax rate)
After tax cost of debt = 7%x(1-35%)
After tax cost of debt = 4.55%
Cost of preferred Stock = Annual dividend on prefered stock / Current market price of Preferred stock
Assumming market price as $53 a share ,Annual dividend as $5
Cost of prefered Stock = 5/53x100
Cost of preferred Stock = 9.43%