Several years ago a bond is sold at its par value ($1,000). The time to maturity is 20 years. The coupon rate is 7.00%. The coupon payments are made semiannually. The current price of the bond is $1,150, and the company's tax rate is 40%. What is the component cost of debt for use in the WACC calculation? 4.16% 2.58% 2.89% 3.44%
Answers
The component cost of debt for use in the WACC calculation is 3.44%
Explanation:
We use the Rate formula shown in the spreadsheet for this question
The NPER represents the time period.
Given that,
Present value = $1,150
Assuming figure - Future value or Face value = $1,000
PMT = 1,000 × 7% ÷ 2 = $35
NPER = 20 years × 2 = 40 years
The formula is shown below:
= Rate(NPER;PMT;-PV;FV;type)
The present value come in negative
Upon solving this, the pretax cost of debt is 5.73%
And, the after tax cost of debt is
= Pretax cost of debt × ( 1 - tax rate)
= 5.73% × ( 1 - 0.40)
= 3.44%
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