Q: Dublin International Corporation’s marginal tax rate is 40%. It can issue three-year bonds with a coupon rate of 8.5% and par value of $1,000. The bonds can be sold now at a price of $938.90 each.

The underwriters will charge $23 per bond in flotation costs. Determine the approximate after-tax cost of debt for Dublin International to use in a capital budgeting analysis.
A. 5.1%
B. 8.5%
C. 9.2%
D. 6.0%

A: coupon rate of 8.5%
marginal tax rate is 40%.
after tax cost of debt = KD(1-T)
= 0.085(1-0.40)= 0.051

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