Question

Kenny Electric Company's noncallable bonds were issued several years ago and now have 20 years to maturity. These bonds have a 9.25% annual coupon, paid semiannually, sells at a price of $1,075, and has a par value of $1,000. If the firm's tax rate is 40%, what is the component cost of debt for use in the WACC calculation?a. 4.35%b. 4.58%c. 4.83%d. 5.08%e. 5.33%

Answer 1

d. 5.08% .

Step-by-step explanation

Give that Kenny Electric Company's noncallable bonds were issued several years ago and now have 20 years to maturity. These bonds have a 9.25% annual coupon, paid semiannually, sells at a price of $1,075, and has a par value of $1,000 and that if the firm's tax rate is 40%, what is the component cost of debt for use in the WACC calculation . To do this our first step is to calculate the yield to maturity (YTM)as follows :

46.25 * [1-(1+YTM/2)ˆ-40]/YTM/2 + 1000/(1+YTM/2)ˆ40 = 1075

Therefore ,YTM = 8.46% . second step we need to calculate the cost of debt as follows . The cost of debt = 8.46% * (1-40%) = 5.08% . This means that the correct answer is d. 5.08% .