Question

In: Finance

A company's 8% annual coupon rate, semi-annual coupon payment, $1,000 Face Value bond has 30-years until...

A company's 8% annual coupon rate, semi-annual coupon payment, $1,000 Face Value bond has 30-years until maturity and is currently selling at a price = $775. The company's Federal income tax rate = 22%.

What is the firm's after tax component cost of debt for the purpose of calculating the WACC?

Solutions

Expert Solution

The question is solved by computing the before tax cost of debt. The yield to maturity is calculated to compute the before tax cost of debt.

Information provided:

Face value= future value= $1,000

Current price= present value= $775

Time= 30 years

Coupon rate= 8%

Coupon payment= 0.08*1,000= $80

Enter the below in a financial calculator to compute the yield to maturity:

FV= 1,000

PV= -775

N= 30

PMT= 80

Press the CPT key and I/Y to compute the yield to maturity.

The value obtained is 10.4836.

Hence, the yield to maturity is 10.48%.

After tax cost of debt= Before tax cost of debt*(1 – tax rate)

                                       = 10.48%*(1 – 0.22)

                                      = 8.1744% 8.17%.

In case of any query, kindly comment on the solution


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