Question

To help finance a new plant, Roxxon, Inc. just sold a noncallable 40 year bond. This $1,000 par bond sells for $1,155 and has a 8.25% annual coupon, paid semiannually. Assume there are no flotation costs, and the firm's tax rate is 30%, what is the component after-tax cost of debt for use in the WACC calculation?

Answer 1

4.96%

Step-by-step explanation:

In order to determine the component after-tax cost of debt first we need to compute the before tax cost of debt by applying the RATE formula which is to be shown in the attachment below:

Given that,

Present value = $1,155

Future value or Face value = $1,000

PMT = 1,000 × 8.25% ÷ 2 = $41.25

NPER = 40 years × 2 = 80 years

The formula is shown below:

= Rate(NPER;PMT;-PV;FV;type)

The present value come in negative

So, after applying the above formula

1. The pretax cost of debt is 3.54% × 2 = 7.08%

2. And, the after tax cost of debt would be

= Pretax cost of debt × ( 1 - tax rate)

= 7.08% × ( 1 - 0.30)

= 4.96%