Question

Kenny Electric Company’s noncallable bonds were issued several years ago and now have 6 years to maturity. These bonds have 9.25% annual coupon, paid semiannually, sell at a price of $1,075, and have a par value of $1,000. If a firm’s tax rate is 40%, what is the component after-tax cost of debt for use in the WACC calculation? SHOW CALCULATIONS

Answer 1

Before tax cost of debt that is YTM of bond is calculated in excel and screen shot provided below:

Before tax cost of debt that is YTM of bond is 7.67%.

Tax rate = 40%

After tax cost of debt = 7.67% × (1 - 40%)

= 4.60%

component after-tax cost of debt for use in the WACC calculation is 4.60%.