Why is the after-tax cost of debt rather than the before-tax cost used
to calculate the WACC?
Why is the relevant cost of debt the interest rate on new debt, not
that on already outstanding, or old, debt?
A company has outstanding long-term bonds with a face value of
$1,000, an 11 percent coupon, and an 8 percent yield to maturity. If
the company were to issue new debt, what would be a reasonable
estimate of the interest rate on that debt? If the company’s tax rate is
40 percent, what would its after-tax cost of debt be?
