The dollar cost of debt for Coval Consulting, a U.S. research firm, is 7.5%. The firm faces a tax rate of 30% on all income, no matter where it is earned. Managers in the firm need to know its yen cost of debt because they are considering launching a new bond issue in Tokyo to raise money for a new investment there. The risk-free interest rates on dollars and yen are r$ = 5%

and r¥ = 1%, respectively. Coval Consulting is willing to assume that capital markets are internationally integrated and that its free cash flows are uncorrelated with the yen-dollar spot rate.

What is Coval Consulting’s after-tax cost of debt in yen? (Hint : Start by finding the after-tax cost of debt in dollars and then find the yen equivalent.)

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