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Answer :
Tenneson Ltd.'s aftertax cost of debt is approximately 3.17%.
To calculate the aftertax cost of debt, we use the formula:
Aftertax Cost of Debt = Pre-tax Cost of Debt × (1 - Tax Rate).
Given that the bonds are quoted at 97.4% of par, and they have a 4% annual coupon, we can find the pre-tax cost of debt by dividing the annual coupon payment by the current market price. This gives us: Pre-tax Cost of Debt = (0.04 / 0.974) ≈ 0.04106, or 4.106%.
Using the given tax rate of 21%, we can then calculate the aftertax cost of debt: Aftertax Cost of Debt = 4.106% × (1 - 0.21) ≈ 3.17%.
Therefore, Tenneson Ltd.'s aftertax cost of debt is approximately 3.17%.
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