Question

To help finance a major expansion, Castro Chemical Company sold a noncallable bond several years ago that now has 20 years to maturity. This bond has a 9.25% annual coupon, paid semiannually, sells at a price of $875, and has a par value of $1,000. If the firm's tax rate is 25%, what is the component cost of debt for use in the WACC calculation

Answer 1

Answer:

8.09%

Explanation:

Semi annual coupon = 1000*(9.25/2)% = 46.25

N = (20*2) = 40

Using Ms Excel to get I/Y

N = 40, PV=-875, PMT = 46.25, FV = 1000

CPT I/Y = I/Y(n, -pv, pmt, fv) * 2

CPT I/Y = I/Y(40, -875, 46.25, 1000) * 2

CPT I/Y = 5.39% * 2

CPT I/Y = 10.78%

After tax cost of debt = 10.78%*(1 - 0.25)

After tax cost of debt = 10.78%*0.75

After tax cost of debt = 0.08085

After tax cost of debt = 8.09%