Question

Several years ago the Pettijohn Company sold a $1,000 par value, noncallable bond that now has 15 years to maturity and a 8.00% annual coupon that is paid semiannually. The bond currently sells for $950, and the company’s tax rate is 25%. To issue new bonds, Pettijohn would incur 3% flotation costs. What is the component cost of debt for use in the WACC calculation? Enter your answer rounded to two decimal places. Do not enter % in the answer box. For example, if your answer is 0.12345 or 12.345% then enter as 12.35 in the answer box.

Answer 1

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Answer:

COUPON RATE 8.00% YEARS TO MATURITY 15 NPER 30 (years to maturity x 2) PMT 40 (face value x coupon rate)/2 FACE VALUE $1,000.00 PRICE = PV = $921.50 RATE = 4.48% rate(nper,pmt,-pv,fv) rate(30,40,-921.50,1000) YIELD TO MATURITY = RATE X 2 = 8.96% [4.48%*2) after tax cost of debt = 6.72% (Aftertax cost of debt] (YTM X (1-T) [ 8.96%*(1-0.25) ]