To help finance a major expansion, Castro Chemical Company sold a non-callable bond several years ago that now has 20 years to maturity.

To help finance a major expansion, Castro Chemical Company sold a non-callable bond several years ago that now has 20 years to maturity. This bond has a 9.25% annual coupon, paid semiannually, sells at a price of $875, and has a par value of $1,000. If the firm's tax rate is 40%, what is the component cost of debt for use in the WACC calculation?

a) 5.95% b) 5.63% c) 6.47% d) 6.15% e) 5.31%

Expert Solution

Correct option is > c) 6.47%

Frequency	2
Tax	40%
Using financial calculator BA II Plus - Input details:	#
FV = Future Value / Face Value =	-$1,000.00
PV = Present Value =	$875.00
N = Number of years remaining x frequency = 20 x 2 =	40
PMT = Payment = Coupon rate x Face value / frequency = 9.25% x -1000 / 2 =	-$46.25
CPT > I/Y = Rate per period =	5.393093
*Before tax cost of debt = YTM = Frequency/100 x Rate = 2/1005.393093 =**	10.79%
*After tax cost of debt = WACC purpose = YTM x (1-Tax) = 0.107862(1-0.4) =**	6.47%

jeff jeffy answered 3 years ago

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