A companys 6 coupon rate semiannual payment 1000 par value b

A company\'s 6% coupon rate, semiannual payment, $1,000 par value bond that matures in 25 years sells at a price of $587.6. The company\'s federal-plus-state tax rate is 35%. What is the firm\'s after-tax component cost of debt for purposes of calculating the WACC?

Solution

After tax cost of debt is the interest rate on the debt multiplied by 100% minus income tax rate.

After tax cost of debt = Interest rate *(1-Tax rate)

Interest rate = 6% = 0.06

Tax rate = 35% = 0.35

After tax cost of debt = 0.06*(1-0.35) = 0.039 = 3.9%

After tax cost of debt = 3.9%