Question

United Parcel Service issued a bond with 30 years to maturity and a semiannual coupon rate of 6 percent 4 years ago. The bond currently sells for 95 percent of its face value. The company’s tax rate is 35 percent.

a.	What is the pretax cost of debt? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Pretax cost of debt

%

b.	What is the aftertax cost of debt? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Aftertax cost of debt

%

c.	Which is more relevant, the pretax or the aftertax cost of debt?
	Aftertax cost of debt Pretax cost of debt

Answer 1

c. After tax cost of debt is more relevant for WACC calculation as that is the actual cost.