Question

To help finance a major expansion, Miami Development, Inc. sold a noncallable bond several years ago that now has 10 years to maturity. This bond has a 9.50% annual coupon, paid semiannually, it sells at a price of $1,250, and it has a par value of $1,000. MDI's marginal tax rate is 39.00% and new bonds have 3% flotation costs. What component cost of debt should be used in the WACC calculation? Note: Enter your answer rounded off to two decimal points. Do not enter % in the answer box. For example, if your answer is 0.13456 or 13.456% then enter as 13.46 in the answer box.

Answer 1

K = Nx2

Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2

k=1

K =10x2

1250 =∑ [(9.5*1000/200)/(1 + YTM/200)^k]     +   1000/(1 + YTM/200)^10x2

k=1

YTM% = 6.12

After tax rate = YTM * (1-Tax rate)

After tax rate = 6.12 * (1-0.39)

After tax rate = 3.73