Waste Disposal Systems, Inc, has an aftertax cost of debt of 6 percent. With a tax rate of 33 percent, what can you assume the yield on the debt is? Solution: Waste Disposal Systems, Inc. K=Yield(1-T) K Yield 6%6% Yield 8.95% (1-.3)67 9% is an acceptable answer l1-6 Addison glass Company has a $1,000 par value bond outstanding with 25 years to maturity. The bond carries an annual interest payment of $88 and is currently selling for $925. Addison is in a 25 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 a. Compute the approximate yield to maturity(formula 11-1)on the old issue and use this as the yield for the new issue b. Make the appropriate tax adjustment to determine the aftertax cost of debt 385 Copyright C2005 by The McGra-Hill Companies, Inc.Copyright © 2005 by The McGraw-Hill Companies, Inc. S-385 11-5. Waste Disposal Systems, Inc., has an aftertax cost of debt of 6 percent. With a tax rate of 33 percent, what can you assume the yield on the debt is? Solution: Waste Disposal Systems, Inc. ( ) ( ) 8.95% .67 6% 1 .33 6% Yield 1 T K Yield K Yield (1 T) d d = = − = − = = − 9% is an acceptable answer. 11-6. Addison Glass Company has a $1,000 par value bond outstanding with 25 years to maturity. The bond carries an annual interest payment of $88 and is currently selling for $925. Addison is in a 25 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. a. Compute the approximate yield to maturity (Formula 11-1) on the old issue and use this as the yield for the new issue. b. Make the appropriate tax adjustment to determine the aftertax cost of debt