Taxes and the cost of borrowing

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(Taxes and the cost of borrowing) A new debt issue bearing a 12% coupon and maturing in one lump sum at the end of 10 years involves issuance expenses equal to 2% of the gross proceeds. Use semi-annual coupons.

a. Assume the issuing firm pays tax at a 50% marginal rate. What is the after-tax cost of debt?

b. Suppose instead the firm is not a taxpayer and expects never to be. What is the after-tax cost of debt?

c. Explain how your answer to part b would change if the firm expected to pay taxes at a 50% rate after five years.

Reference no: EM132409626

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