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. |