Purchase Solution

Calculating cost of debt

Not what you're looking for?

Ask Custom Question

In an effort to raise money, a company sold a bond that now has 20 years of maturity. The bond has a 7% annual coupon which is paid quarterly and it now sells at a price of 1103.58. The bond has a par value of $1000 and can't be called. If the companies tax rate is now 40%, what component of debt should be used in the WACC calculations?

Purchase this Solution

Solution Summary

The solution describes the steps to calculate cost of debt.

Solution Preview

Please refer attached file for better clarity of formulas used.

Solution:

Coupon amount=(1000*7%/4)=$17.50 quarterly
Current price of bond=$1,103.58
Number of coupon payments left=20*4=80

Let us analyze cash flows from the company's point view

Period Cash flows
0 1103.58
1 -17.5
2 -17.5
3 -17.5
4 -17.5
5 -17.5
6 -17.5
7 -17.5
8 -17.5
9 -17.5
10 -17.5
11 -17.5
12 ...

Solution provided by:
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
Recent Feedback
  • "Thank you"
  • "Really great step by step solution"
  • "I had tried another service before Brain Mass and they pale in comparison. This was perfect."
  • "Thanks Again! This is totally a great service!"
  • "Thank you so much for your help!"
Purchase this Solution


Free BrainMass Quizzes
MS Word 2010-Tricky Features

These questions are based on features of the previous word versions that were easy to figure out, but now seem more hidden to me.

Social Media: Pinterest

This quiz introduces basic concepts of Pinterest social media

Transformational Leadership

This quiz covers the topic of transformational leadership. Specifically, this quiz covers the theories proposed by James MacGregor Burns and Bernard Bass. Students familiar with transformational leadership should easily be able to answer the questions detailed below.

Understanding the Accounting Equation

These 10 questions help a new student of accounting to understand the basic premise of accounting and how it is applied to the business world.

Academic Reading and Writing: Critical Thinking

Importance of Critical Thinking