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Homework answers / question archive / Assume that Western Asset Management Company LLC (WAMC) has $1,000 par value zero-coupon bonds outstanding
Assume that Western Asset Management Company LLC (WAMC) has $1,000 par value zero-coupon bonds outstanding. WAMC bonds are currently trading at $550 with 8 years to maturity. WAMC tax bracket is 35%. Calculate the cost of debt after tax for WAMC (System will not accept percentage (%) sign, therefore write your answer up to four decimals).
Use RATE function in EXCEL to find the cost of debt
=RATE(nper,pmt,pv,fv,type)
nper=8 years
pmt=annaul coupon=0 (zero coupon)
pv=current price=550
fv=1000
=RATE(8,0,-550,1000,0)=7.76%
after tax cost of debt=cost of debt*(1-tax rate)=7.76%*(1-35%)=5.04%
