Question

A company’s 6% coupon rate, semiannual payment,$1,000 par value bond that matures in 30 years sells at a price of $821.97. The company’s tax rate is 30%. What is the firm’s component cost of debt for purposes of calculating the WACC? (Hint: Base your answer on the nominal rate.)

Answer 1

K = Nx2

Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2

k=1

K =30x2

821.97 =∑ [(6*1000/200)/(1 + YTM/200)^k]     +   1000/(1 + YTM/200)^30x2

k=1

YTM = 7.5% = before tax cost of debt

After tax rate = YTM * (1-Tax rate)

After tax rate = 7.5 * (1-0.3)

After tax rate = 5.25