Terrier Company is in a 45 percent tax bracket and has a bond outstanding that yields 11percent to maturity.
a. What is Terrier’s after tax cost of debt?
b. Assume that the yield on the bond goes down by 1 percentage point, and due to tax reform, the corporate tax rate falls to 30percent. What is Terrier’s new after tax cost of debt?
c. Has the after tax cost of debt gone up or down from part a to part b? Explain why.