1-7. Continued b Kd= Yield(1-T 10.11%(1-35) 10.11%(65) 6.57% l1-8 For Hewlett Software Corporation, described in problem 7, assume that the yield on the bonds goes up by I percentage point and that the tax rate is now 4. percent a. What is the new aftertax cost of debt? b. Has the aftertax cost of debt gone up or down from problem 7? Explain wny Solution: Hewlett Software Corporation( Continued) a. Kd= Yield (1-T 11.11%(1-45) 11.11%(55) 6.11% b. It has gone down. Although the before-tax yield is higher, the larger tax deduction(45 percent versus 35 percent) more than offsets the higher rate CopyrightC 2005 by The McGray-Hill Companies, Inc.Copyright © 2005 by The McGraw-Hill Companies, Inc. S-388 11-7. Continued b. Kd = Yield (1 – T) = 10.11% (1 – .35) = 10.11% (.65) = 6.57% 11-8. For Hewlett Software Corporation, described in problem 7, assume that the yield on the bonds goes up by 1 percentage point and that the tax rate is now 45 percent. a. What is the new aftertax cost of debt? b. Has the aftertax cost of debt gone up or down from problem 7? Explain why. Solution: Hewlett Software Corporation (Continued) a. Kd = Yield (1 – T) = 11.11% (1 – .45) = 11.11% (.55) = 6.11% b. It has gone down. Although the before-tax yield is higher, the larger tax deduction (45 percent versus 35 percent) more than offsets the higher rate