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The Lincoln Company sold a $1,000 par value, noncallable bond several years ago that now has...

The Lincoln Company sold a $1,000 par value, noncallable bond several years ago that now has 20 years to maturity and a 7.00% annual coupon that is paid semiannually. The bond currently sells for $925 and the company's tax rate is 40%. What is the component cost of debt for use in the WACC calculation?

a. 4.83% b. 4.28% c. 5.03% d. 4.46% e. 4.65%

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Answer #1

FV = $1000

N = 40 YEARS

PMT = $35

PV = ($925)

So, the I/Y = 3.87%

The annual yield is 7.74%, so the after tax cost of debt is :

= 7.74% * 0.6

= 4.65%

So, the correct option is option E.

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