Several years ago the Jakob Company sold a $1,000 par value, noncallable bond that now has 20 years to maturity and a 7.00% annual coupon that is paid semiannually. The bond currently sells for $875 and the company’s tax rate is 25%. What is the component cost of debt for use in the WACC calculation?
Answer : Calculation of Component Cost of Debt ( After Tax)
After Tax Cost of Debt is 6.37%
Calculation :
Using Financial Calculator
=RATE(nper,pmt,pv,fv)
where nper is Number of years i.e 15*2 = 30 ( As Coupons are Paid semiannually)
pmt is Interest payment i.e 1000 * 7.00% =70 / 2 = 35 ( As Coupons are Paid semiannually)
pv is Current Market Price
= - 875
Note : pv should be taken as negative.
fv is face value i.e 1000
=RATE(30,35,-875,1000)
therefore ,Before tax cost of Debt is 4.2445%(six monthly)
Annual = 4.2445% * 2 = 8.489% per annum
After tax cost of Debt = 8.489 * (1 - Tax rate )
= 8.489 * (1 - 0.25)
= 6.36675% or 6.37%
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