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A firm has $1,000 par value bonds currently selling for $975. The bonds have a coupon...

A firm has $1,000 par value bonds currently selling for $975. The bonds have a coupon rate of 11% and are paying interest semiannually. The bonds are due to reach maturity in 15 years. If the firm's tax rate is 30%, what cost of debt should be used in arriving at the firm's weighted-average cost of capital?

Select one:

A. 7.95%

B. 6.16%

C. 8.95%

D. 10.16%

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Answer #1

Solution:-

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Cost of Debt Annually Before tax = 5.68% * 2

Cost of Debt Annually Before tax = 11.36%

To Calculate cost of debt after tax should be used in arriving at the firm's weighted-average cost of capital-

Cost of debt after tax = 11.36% (1 - Tax rate)

Cost of debt after tax = 11.36% (1 - 0.30 )

Cost of debt after tax = 7.95%

The Correct answer is point A i.e. 7.95%

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