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A company's 6% coupon rate, semiannual payment, $1,000 par value bond that matures in 20 years...

A company's 6% coupon rate, semiannual payment, $1,000 par value bond that matures in 20 years sells at a price of $726.88. The company's federal-plus-state tax rate is 30%. What is the firm's after-tax component cost of debt for purposes of calculating the WACC? (Hint: Base your answer on the nominal rate.) Round your answer to two decimal places.

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Answer #1

Cost of debt for WACC is taken at YTM of the bond. In the given case, YTM= 8.959962% calculated using RATE function of Excel as follows:

Given, tax rate= 30%

After tax component cost of debt= Cost of debt*(1-Tax Rate)

= 8.959962*(1-0.30) = 0.06271974= 6.27%

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