A XYZ Cos. bond has a $1,000 face value and a coupon rate of 6.2% paid annually. The firms marginal tax rate is 35%. Assuming no flotation costs and origination fees to issue the bond, what is the after-tax cost of debt for XYZ Co.?

kdat = kdbt (1 t)

Where: kdat = After tax cost of debt

kdbt = Before tax cost of debt

t = Marginal tax rate in decimal format

kdat = ____________ x (1 ___________) =

Clearly, everyone likes a lower tax rate because we dont have to pay as much in taxes. However, how does a lower tax rate effect the attractiveness of debt?

What would be XYZ Cos. after tax cost of debt if corporate tax rates are reduced by 10% across the board making XYZ Cos. marginal tax rate 25%?

kdat = ____________ x (1 ___________) =

Based on these results, does a tax cut for the company make debt more or less preferable in terms of net out of pocket costs?

MORE PREFERABLE or LESS PREFERABLE