Question

ebook Bond Yield and Alter Tax Cost of Debt A company's 7% coupon rate, semiannual payment, $1,000 par value bond that matures in 30 years sells at a price of $585.98. 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 Check My Work (3 remaining)

Answer 1

1. Information provided:

Par value= future value= $1,000

Current value= present value= $595.98

Time= 30 years

Coupon rate= 7%

Coupon payment= 0.07*1,000= $70

The yield to maturity is calculated by entering the below in a financial calculator:

FV= 1,000

PV= -585.98

N= 30

PMT= 70

Press the CPT key and I/Y to compute the yield to maturity.

The value obtained is 12.2260.

Therefore, the yield to maturity is 12.23%.

After tax cost of debt= before tax cost of debt*(1 – tax rate)

                                        = 12.23%*(1 – 0.30)

                                        = 8.5582% $\rightarrow$ 8.56%.

2.Information provided:

Preference shares dividend= 5%

Share price= $63

Flotation costs= 5%

            Par value= $60

Preference shares do not have any tax benefits like debt.

Preferred stock dividend= 0.05*$60

                                                = 3

The cost of preferred stock= $3/$63*(1-0.05)

                                                    = $3/$59.85= 0.0501*100= 5.0125%$\rightarrow$5.01%.

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