To help finance a new plant, Roxxon, Inc. just sold a noncallable 40 year bond. This $1,000 par bond sells for $1,155 and has a
8.25% annual coupon, paid semiannually. Assume there are no flotation costs, and the firm's tax rate is 30%, what is the component after-tax cost of debt for use in the WACC calculation?
1 answer:
Answer:
4.96%
Explanation:
In order to determine the component after-tax cost of debt first we need to compute the before tax cost of debt by applying the RATE formula which is to be shown in the attachment below:
Given that,
Present value = $1,155
Future value or Face value = $1,000
PMT = 1,000 × 8.25% ÷ 2 = $41.25
NPER = 40 years × 2 = 80 years
The formula is shown below:
= Rate(NPER;PMT;-PV;FV;type)
The present value come in negative
So, after applying the above formula
1. The pretax cost of debt is 3.54% × 2 = 7.08%
2. And, the after tax cost of debt would be
= Pretax cost of debt × ( 1 - tax rate)
= 7.08% × ( 1 - 0.30)
= 4.96%
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