Answer:
4.64%
Step-by-step explanation:
The component cost of debt for use in WACC computation is the after-tax cost of debt
pretax cost of debt=yield to maturity
the yield to maturity can be determined using excel rate formula
=rate(nper,pmt,-pv,fv)
nper is the number of times coupon interest would be paid i.e 20*2=40
pmt is the semiannual coupon interest =$1000*7%*6/12=$35
pv is the current price of bond at $925
fv is the face value of $1000
=rate(40,35,-925,1000)=3.87%
This is the semiannual yield
annual yield =3.87% *2=7.74%
After tax cost of debt=pretax cost of debt*(1-t)
t is the tax rate at 40% or 0.4
after tax cost of debt=7.74% *(1-0.4)=4.64%