To calculate the after-tax cost of debt, use the formula:

$\text{After-tax cost of debt} = \text{Yield to Maturity} \times (1 - \text{Tax Rate})$

Given:

• Yield to Maturity ($YTM$) = 7.41% = 0.0741
• Tax Rate = 35.88% = 0.3588

Substitute these values into the formula:

$\text{After-tax cost of debt} = 0.0741 \times (1 - 0.3588)$

Calculate:

$\text{After-tax cost of debt} = 0.0741 \times 0.6412 = 0.0475 \, \text{or} \, 4.75\%$

Final Answer:

The after-tax cost of debt for House Builders, Inc. is 4.75%.

Would you like further explanation or examples of how this calculation applies in financial analysis?

Related Questions:

1. How does the tax rate impact the after-tax cost of debt?
2. What would the after-tax cost of debt be if the tax rate increased to 40%?
3. How does the after-tax cost of debt affect a company's weighted average cost of capital (WACC)?
4. Why is it important to consider the after-tax cost of debt rather than just the YTM?
5. How does the cost of debt compare to the cost of equity in a typical capital structure?

Tip:

Always check the tax rate applicable to the firm when calculating the after-tax cost of debt, as it can significantly alter the results.