# 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

 ArcSine Posts: 961, Reputation: 523 Senior Member #2 Feb 8, 2010, 02:42 PM
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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