Question

please complete all parts to the question

2. An overview of a firm's cost of debt For which capital component must you make a tax adjustment when calculating a firm's weighted average cost of capital (WACC)? Debt Preferred stock Equity Water and Power Company (WPC) can borrow funds at an interest rate of 10.20% for a period of five years. Its marginal federal-plus-state tax rate is 25%. WPC's after-tax cost of debt is (rounded to two decimal places). At the present time, Water and Power Company (WPC) has 20-year noncallable bonds with a face value of $1,000 that are outstanding. These bonds have a current market price of $1,382.73 per bond, carry a coupon rate of 13%, and distribute annual coupon payments. The company incursa federal-plus-state tax rate of 25%. If WPC wants to issue new debt, what would be a reasonable estimate for its after-tax cost of debt (rounded to two decimal places)? (Note: Round your YTM rate to two decimal place.) 6.64% 7.97% 5.98% 7.64%

Answer 1

a) Debt

b) After-tax cost =10.2%*(1-25%) =7.65%

c) YTM:-

=RATE(nper,pmt,pv,fv)*(1-tax)

=RATE(20,13%*1000,-1382.73,1000)*(1-0.25)

=6.64%