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    Component cost of debt

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    To help finance a major expansion, Delano Development Company sold a noncallable bond several years ago that now has 15 years to maturity. This bond has a 10.25% annual coupon, paid semiannually, it sells at a price of $1,025, and it has a par value of $1,000. If Delano's tax rate is 40%, what component cost of debt should be used in the WACC calculation?

    a. 5.11%
    b. 5.37%
    c. 5.66%
    d. 5.96%
    e. 6.25%

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    Solution Preview

    The component cost will be the after tax yield to maturity on the current bond because the YTM represents the current ...

    Solution Summary

    The solution explains how to component cost of debt to be used in the calculation of WACC.