Question

For which capital component must you make a tax adjustment when calculating a firm’s weighted average cost of capital (WACC)?

Preferred stock

Debt

Equity

Water and Power Company (WPC) can borrow funds at an interest rate of 10.20% for a period of eight years. Its marginal federal-plus-state tax rate is 25%. WPC’s after-tax cost of debt is (10.20% , 6.50%, 8.42%, 7.65%) (rounded to two decimal places).

At the present time, Water and Power Company (WPC) has 10-year noncallable bonds with a face value of $1,000 that are outstanding. These bonds have a current market price of $1,278.41 per bond, carry a coupon rate of 11%, and distribute annual coupon payments. The company incurs a federal-plus-state tax rate of 25%. If WPC wants to issue new debt, what would be a reasonable estimate for its after-tax cost of debt (rounded to two decimal places)? (Note: Round your YTM rate to two decimal place.)

4.22%

6.32%

5.27%

6.06%

Answer 1