Question

Kenny Electric Company's noncallable bonds were issued several years ago and now have 20 years to maturity. These bonds have a 9.25% annual coupon, paid semiannually, sells at a price of $1,075, and has a par value of $1,000. If the firm's tax rate is 25%, what is the component cost of debt for use in the WACC calculation?

a. 6.67%

b. 6.03%

c. 5.73%

d. 5.44%

e. 6.35%

Answer 1

Answer :

A	Face value ( FV )	$ 1,000
B	Coupon rate	9.25%
C	Number of compounding periods per year	2
A * B / C	Interest per period ( PMT )	$ 46.25
	Bond price ( PV )	$ 1,075
D	Number of years to maturity	20
D * C	Number of compounding periods till maturity ( NPER )	40

Bond yield to maturity =RATE(NPER,PMT,-PV,FV)

=RATE(40,46.25,-1075,1000)*2

Bond yield to maturity = 8.47%

Component cost of debt = 8.47% * ( 1 - 25% ) = 6.35%

The answer is option (e) i.e., 6.35%