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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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7 0
2 years ago
Kent and Craig, who want to start a horse-training business, spoke to an insurance agent about getting insurance to cover potent
erica [24]

Answer:

Solution: the answer in delivered in 2 stages because of the character of dualistic problems:-

Part (1)

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7 0
3 years ago
West Corp. issued 20-year bonds two years ago at a coupon rate of 8.3 percent. The bonds make semiannual payments. If these bond
lora16 [44]

Answer:

Yield to Maturity (YTM) is 7.94 %.                      

Explanation:

Yield to Maturity (YTM) refers to internal rate of return that bond holder will earn if he purchased the bond today at the current market price and held it till maturity of the bond.

Yield to Maturity of the the bond = [Coupon payment+ (Future value of bond - Present value of bond / no. of Periods)] / [(Future value of bond + Present value of bond)/2] ---- (a)

Bond maturity period = 20 years

Coupon rate = 8.3 %

Par Value = 1000

No. of periods = 2 x 20 = 40 (semi- annual)

Coupon payment = 8.3 % x 1000 = 83 = 83/2 = 41.5 (Semi-annual)

Present value of bond = 104 percent of Par value = 104

Future value of bond = 1000

YTM = ?

Putting the values in equation (a),

Semi annual YTM = [41.5 + (1000-1040 / 40)] / [(1000 + 1040)/2]

Semi annual YTM = [41.5 + (-40/40) ] / [(1040)/2]

Semi annual YTM= [41.5 - 1] / 1020

Semi annualv YTM =  40.5 / 1020 = 0.0397

Hence, Annual yield to maturity = 0.0397 x 2 = 0.0794 or 7.94 %.

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sergey [27]
The answer is goods :)
8 0
3 years ago
Cody Manufacturing started doing business on January 1st of the current year. Cody estimates that its sales will be 9,000 units
uranmaximum [27]

Answer:

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Explanation:

i like it

4 0
3 years ago
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