Question

a companys 7% coupon rate, semiannual payment, is $1000 par value bond that matures in 30 years sells at a price of $638.11. the companys federal plus state tax rate is 30%. what is the firms after tax component cost of debt for purposes of calculating the WACC

Answer 1

After tax component cost of debt 7.01%

Working:

Step-1:Calculation of before tax cost of debt

Before tax cost of debt

=

Average Income/Average Investment

(Semi annual)

=

(Coupon interest+(Par Value-Current Selling Price)/Semi annual period)/((Par Value +Current Selling Price)/2)

=

(35+(1000-638.11)/60)/((1000+638.11)/2)

=

5.01%

Before tax cost of debt

=

2

x

5.01%

(Annual)

=

10.02%

Working:

Semi annual coupon

=

Par Value x semi annual coupon rate

=

$        1,000

x

3.50%

=

$              35

Semi annual period

=

60

Step-2:Calculation of after tax cost of debt

After tax cost of debt

=

Before tax cost of debt*(1-Tax Rate)

=

10.02%

*(1-0.30)

=

7.01%