Question

The after tax cost of debt is the interest rate that a firm pays on any new debt financing. Water and Power Company (WPC) can borrow funds at an interest rate of 12.50% for a period of eight 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 5-year noncallable bonds with a face value of $1,000 that are outstanding. These bonds have a current market price of $1.229.24 per bond, carry a coupon rate of 10%, and distribute annual coupon payments. The company incurs a 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.) O 2.85% 03.209 4.094 3.56

Answer 1

B ANSWER 2 5 A 226 CALCULATIONS 228 ANSWER 1 229 230 Before-tax cost 0.125 231 Tax rate 0.25 232 233 After-tax cost of debt =C230* (1-C231) 234 235 236 237 nper (bond tenure) pmt (annual coupon) pv (current market price) fv (par value) =1000*10% 1229.24 1000 rate (before-tax cost of debt) =RATE(H230,H231,-H232, H233) Tax rate 0.25 238 After-tax cost of debt =H235*(1-H236)

DF 226 ANSWER 2 12.50% 25% 228 ANSWER 1 229 230 Before-tax cost 231 Tax rate 232 233 After-tax cost of debt 234 235 nper (bond tenure) pmt (annual coupon) pv (current market price) fv (par value) 100 1229.24 9.38% 1000 rate (before-tax cost of debt) Tax rate 5% 25% 236 237 238 After-tax cost of debt 3.56%