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A company's 8% coupon rate, semiannual payment, $1,000 par value bond that matures in 30 years...

A company's 8% coupon rate, semiannual payment, $1,000 par value bond that matures in 30 years sells at a price of $749.05. The company's federal-plus-state tax rate is 40%. What is the firm's after-tax component cost of debt for purposes of calculating the WACC? (Hint: Base your answer on the nominal rate.) Round your answer to two decimal places.

what is the answer? %

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Expert Solution

At 10.84% ytm bond price is equal to $749.05

Particulars Cash flow Discount factor Discounted cash flow
present value Interest payments-Annuity (5.42%,60 periods) $                         40.00 17.67283 $                706.91
Present value of bond face amount -Present value (5.42%,60 periods) $                    1,000.00 0.04213 $                  42.13
Bond price $                749.05
Face value $             1,000.00
Premium/(Discount) $              (250.95)
Interest amount:
Face value 1,000
Coupon/stated Rate of interest 8.000%
Frequency of payment(once in) 6 months
Interest amount 1000*0.08*6/12= $                  40.00

after tax interest rate = 10.84% × (1-40%) = 6.24%

answer is 6.24%

Please rate.

ekkarill92 answered 2 years ago
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