The firm's after-tax cost of debt is 8.58%.
Information provided:
Face value= future value= $1,000
Present value= $890
Coupon rate= 9%
Coupon payment= 0.09*1,000= $90
Time= 10 years
Tax rate= 21%
The question is solved by first calculating the before-tax cost of debt which is the yield to maturity.
Enter the below in a financial calculator to compute the yield to maturity:
FV= 1,000
PV= -890
PMT= 90
N= 10
Press the CPT key and I/Y to calculate the yield to maturity.
The value obtained is 10.8566.
Therefore, the before-tax cost of debt is 10.86%.
After tax cost of debt= before tax cost of debt*(1 – tax arte)
= 10.8566%*(1 - 0.21 )
= 8.5767%
= 8.58%
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