Question

Westbrook's Painting Co. plans to issue a $1,000 par value, 20-year noncallable bond with a 7.00% annual coupon, paid semiannually. The company's marginal tax rate is 40.00%, but Congress is considering a change in the corporate tax rate to 30.00%. By how much would the component cost of debt used to calculate the WACC change if the new tax rate was adopted?

Answer 1

Answer:

component cost of debt to calculate wacc = 0.7

Explanation:

given data

par value = $1000

time = 20 year

rate = 7%

tax rate = 40%

tax rate  = 30 %

to find out

cost of debit use to calculate wacc

solution

we know cost of debt before tax is 7%

so when tax is 30 % cost of debt after tax is = 7% ( 1 - tax rate )

cost of debt after tax = 7% ( 1- 0.30 )

cost of debt after tax = 4.9    .......................1

and

so when tax is 40 % cost of debt after tax is = 7% ( 1 - tax rate )

cost of debt after tax = 7% ( 1- 0.40 )

cost of debt after tax = 4.2    .......................2

so

from equation 1 and 2

component cost of debt to calculate wacc = 4.9 - 4.2

component cost of debt to calculate wacc = 0.7