Airborne Airlines Incorporated has 1000 par value Bond outstanding with 25 years to maturity. The bond carries an annual interest payment of $88 and is currently selling for $950. Airborne is in a 40% 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 year for the new issue.
B. make the appropriate tax adjustment to determine the after-tax cost of debt.