A firm's before-tax cost of debt, rd, is the interest rate that the firm must pay on new debt. Because interest is tax deductible, the relevant cost of new debt used to calculate a firm's WACC is the after-tax cost of debt, rd(1 T). The after-tax cost of debt is used in calculating the WACC because we are interested in maximizing the value of the firm's stock, and the stock price depends on after-tax cash flows. It is important to emphasize that the cost of debt is the interest rate on new debt, not outstanding debt because our primary concern with the cost of capital is its use in capital budgeting decisions. The rate at which the firm has borrowed in the past is irrelevant because we need to know the cost of new capital. For these reasons, the yield to maturity on outstanding debt (which reflects current market conditions) is a better measure of the cost of debt than the coupon rate . The yield to maturity on the company's long -term debt is generally used to calculate the cost of debt because, more often than not, the capital is being raised to fund long -term projects. Quantitative Problem: 5 years ago, Barton Industries issued 25-year noncallable, semiannual bonds with a $1,000 face value and a 5% coupon, semiannual payment ($25 payment every 6 months). The bonds currently sell for $844.87. If the firm's marginal tax rate is 25%, what is the firm's after-tax cost of debt? Do not round intermediate calculations. Round your answer to two decimal places. %

A firm's before-tax cost of debt, rd, is the interest rate that the firm must pay on new debt. Because interest is tax deductible, the relevant cost of new debt used to calculate a firm's WACC is the after-tax cost of debt, ra(1 - T). The after-tax cost of debt is used in calculating the WACC because we are interested in maximizing the value of the firm's stock, and the stock price depends on after-tax cash flows. It is important to emphasize that the cost of debt is the interest rate on new debt, not outstanding debt because our primary concern with the cost of capital is its use in capital budgeting decisions. The rate at which the firm has borrowed in the past is irrelevant because we need to know the cost of new capital. For these reasons, the yield to maturity on outstanding debt (which reflects current market conditions) is a better measure of the cost of debt than the coupon rate . The yield to maturity on the company's long -term debt is generally used to calculate the cost of debt because, more often than not, the capital is being raised to fund long -term projects. Quantitative Problem: 5 years ago, Barton Industries issued 25-year noncallable, semiannual bonds with a $1,000 face value and a 5% coupon, semiannual payment ($25 payment every 6 months). The bonds currently sell for $844.87. If the firm's marginal tax rate is 25%, what is the firm's after-tax cost of debt? Do not round intermediate calculations. Round your answer to two decimal places. %