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Homework answers / question archive / A company's 6% coupon rate, semiannual payment, $1,000 par value bond that matures in 30 years sells at a price of $515
A company's 6% coupon rate, semiannual payment, $1,000 par value bond that matures in 30 years sells at a price of $515.16. The company's federal-plus-state tax rate is 25%. 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.)
We can calculate the pretax cost of debt by using the following formula in excel:-
=rate(nper,pmt,-pv,fv)
Here,
Rate = pretax cost of debt (Semiannual)
Nper = 30*2 = 60 periods (semiannual)
Pmt = Coupon payment = $1,000*6%/2 = $30
PV = $515.16
FV = $1,000
Substituting the values in formula:
= rate(60,30,-515.16,1000)
= 6%
Pretax cost of debt = Rate * 2
= 6% * 2
= 12%
After tax cost of debt = Pretax cost of debt * (1 - Tax rate)
= 12% * (1 - 25%)
= 9.00%
