A company's 6% coupon rate, semiannual payment, $1,000 par value bond that matures in 30 years sells at a price of $515

Finance Sep 16, 2020

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.)

Expert Solution

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%

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