Question

Dallas Inc. is considering issuing long-term debt. The debt would have a 30-year maturity and a 10% coupon rate with an annual payment. If the firm can sell this debt for $950 today, and its tax rate is 35%, what is the component cost of debt for use in the WACC calculation?

a. 10.00%
b. 10.56%
c. 6.86%
d. 6.50%
e. 7.23%

Answer 1

c. 6.86%

Step-by-step explanation:

The computation of the cost of debt is shown below:

Here we applied the rate formula

Given that

NPER = 30

PMT = $1,000 × 10% = $100

Assuming future value be $1,000

PV = $950

The formula is shown below:

= RATE(NPER;PMT;PV;FV;TYPE)

The present value should be in negative

After applying the above formula, the rate is 10.55%

Now the after tax cost of debt is

= 10.55% × (1 - 0.35)

= 6.86%

Hence, the correct option is c.