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Bond Yield and After-Tax Cost of Debt for WACC

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A company's 6% coupon rate, semi annual payment, $1,000 par value bond that matures in 30 years sells at a price of $515.16. The company's federal plus state tax rate is 40%. What is the firms component cost of debt for purposes of calculating the WACC? (Hint: Base your answer on the nominal rate)

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Solution Summary

This solution describes the steps for calculating the after tax cost of debt with calculations and answers.

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Please refer attached file for better clarity of tables and formulas.

Solution
Semi annual coupon=1000*6%/2=$30.00
Price of bond= $515.16
No. of coupon payments=30*2= 60

Let us see cash flows throughout 30 years or 60 semi annual periods
End of period Cash Flow
0 $(515.16)
1 30
2 30
3 30
4 30
5 30
6 30
7 30
8 30
9 30
10 30
11 ...

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  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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