In: Finance
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%
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 = 2/100*5.393093 = |
10.79% |
After tax cost of debt = WACC purpose = YTM x (1-Tax) = 0.107862*(1-0.4) = |
6.47% |