Russell Container Corporation has a $1,000 par value bond outstanding with 20 years to maturity. The bond carries an annual interest payment of $123 and is currently selling for $860 per bond. Russell Corp. is in a 25 percent tax bracket. The firm wishes to know what the after tax cost of a new bond issue is likely to be. The yield to maturity on the new issue will be the same as the yield to maturity on the old issue because the risk and maturity date will be similar.

a. Compute the yield to maturity on the old issue and use this as the yield for the new issue. Yield to maturity %

b. Make the appropriate tax adjustment to determine the after tax cost of debt. After tax cost of debt %