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-   -   Component cost of debt for purposes of calculating the WACC? (https://www.askmehelpdesk.com/showthread.php?t=444519)

  • Feb 8, 2010, 08:17 AM
    kfinklea
    component cost of debt for purposes of calculating the WACC?
    a company's 6% coupon rate, semiannual payment, $1000 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 firm's component cost of debt for purposes of calculating the WACC
  • Feb 8, 2010, 02:42 PM
    ArcSine
    First determine the discount rate that equates the bonds' payment stream (60 semi-ann payments of $30 each, and a redemption at maturity of $1,000) with their current trading price of $515. In other words, what discount rate makes that payment stream have a present value of $515?

    That rate, once determined, is the bonds' pre-tax cost of capital. Multiply it by (1 - t) to arrive at the after-tax COC (where t is the firm's effective tax rate, expressed as a decimal).

    That after-tax COC is the one you want as the bonds' component contribution to WACC.

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