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Problem:

Russell Container Corporation has a $3,500 par value bond outstanding with 30 years to maturity. The bond carries an annual interest payment of $148 and is currently selling for $1,370 per bond. Russell Corp. is in a 30 percent tax bracket. The firm wishes to know what the aftertax 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.

Assume that the yield on the bonds goes up by 1 percentage point and that the tax rate is now 39%.

Required:

Question 1: What is the new after-tax cost of debt?

Question 2: Has the after-tax cost gone up or down?

Note: Please explain comprehensively and give step by step solution.

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Accounting Basics, Accounting

Category:- Accounting Basics
Reference No.:- M91169982

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