Question

A company's 7% coupon rate, semiannual payment, $1,000 par value bond that matures in 30 years sells at a price of $562.35. 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.

Answer 1

First calculate yield:

Using financial calculator BA II Plus - Input details:	#
FV = Future Value =	$1,000
PV = Present Value =	-$562.35
N = Total number of payment periods =	60
PMT = Payment =	$35
CPT > I/Y = Rate =	6.35
Convert Yield in annual and percentage form = Yield x 2 x 100	12.70%

Yield = Before tax cost of debt = 12.70

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Now, let’s apply tax shield;

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After tax debt cost = Before tax cost of debt x (1-Tax)

After tax debt cost = 12.70% x (1-30%)

After tax debt cost = 8.89%