Question

The BondsRUs Company needs to estimate the cost of debt in their WACC calculation. The 10-year bond issue would have $1,000 par value, 4% coupon rate, and pay interest semiannually. The bonds would sell for $950 per bond.   SHOW ALL WORK on the TI BAII Plus Calculator.

a) (4 pts) What is the cost of debt?

b) (2 pts) If the marginal tax rate of the company is 21%, what is the after-tax cost of debt to be used in the WACC calculation?

SHOW ALL WORK on the TI BAII Plus Calculator!!!!!

Answer 1

As per the data given in the question-
Enter the stroke in the financial calculator-
N = 20 ( 10*2 = 20)
FV= 1000
PMT = 20 (1000*4% = 40/2 , interest is paid semiannually)
PV = -950
CPT -I/Y = 2.315
a) Cost of debt = 2.315*2 = 4.63
b) cost of debt after tax = Interest (1-t)
Kd = 4.63 ( 1-0.21)
Kd= 3.66%
cost of debt after tax = 3.66%

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