Assume that Western Asset Management Company LLC (WAMC) has $1,000 par value zero-coupon bonds outstanding

Finance Jan 04, 2021

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).

Expert Solution

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%

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