Final answer:
The after-tax cost of debt for XYZ Co. is calculated by first determining the yield to maturity (YTM) on the bond and then adjusting for taxes by multiplying the YTM by (1 - tax rate of 35%). A company typically prefers a lower WACC as it indicates lower financing costs.
Step-by-step explanation:
The after-tax cost of debt for XYZ Co. can be calculated by adjusting the yield to maturity (YTM) for taxes. The bond has a $1,000 par value, a 5.6% annual coupon rate, and was sold for $699 with 15 years to maturity. The first step is to calculate the YTM, which reflects the total return expected on a bond if held to maturity. The tax rate is 35%, so the after-tax cost of debt equals the YTM multiplied by (1 - tax rate). The false statement about preferring a high weighted average cost of capital (WACC) is negated since in practice, a lower WACC is preferable, indicating cheaper financing costs for the company.
To calculate the YTM, we can use financial calculators or spreadsheet tools because it involves solving for the interest rate in the present value of an annuity equation, taking into consideration the current bond price, par value, coupon payments, and the number of periods until maturity. Once we have the YTM, we can calculate the after-tax cost of debt by taking the YTM and multiplying it by (1 - 0.35) to account for the tax shield provided by the interest expense.