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MatroZZZ [7]
3 years ago
8

Several years ago the Haverford Company sold a $1,000 par value bond that now has 25 years to maturity and an 8.00% annual coupo

n that is paid quarterly. The bond currently sells for $900.90, and the company’s tax rate is 40%. What is the component cost of debt for use in the WACC calculation
Business
1 answer:
kodGreya [7K]3 years ago
4 0

Answer:

5.4%

Explanation:

Several years ago the Haverford Company sold a $1,000 par value bond that now has 25 years to maturity and an 8.00% annual coupon that is paid quarterly. The bond currently sells for $900.90, and the company’s tax rate is 40%. What is the component cost of debt for use in the WACC calculation

Face value of bond = coupon amount / interest rate

1000 = 80 / 8%

Therefore 900.9 = 80 / revised interest rate

multiply both sides by the 'revised interest rate

revised interest rate x 900.9 = 80

Hence, revised interest rate = 80  / 900.9 = 9%

Secondly if the company’s tax rate is 40%, the component cost of debt for use in the WACC calculation = kd (1 - t)

where:

kd = Cost of debt

t = tax rate

Therefore cost of debt for use in the WACC calculation = 9% (1-0.4) = 5.4%

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