Sample Essay

The cost of debt is the after tax effect of the interest rate effective on the debt, sometimes the cost of debt is the yield to maturity of a bond but only where a company has issued bonds to acquire long term debt.

After Tax cost of debt = Kd (1-T)

Where Kd may be the interest rate or the yield to maturity but in the case of Foundation Coal there are no bonds and the interest rate effective on the debt – Kd is 7.95% and the tax rate – T is 35% (Foundation Coal Holdings Inc., 2009).

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