Weir Inc has a bond in its capital structure that has 20 yea

Weir Inc. has a bond in its capital structure that has 20 years to maturity left. The bond has a 9.20% coupon paid annually, sells at a price of $1,000 and has a par value of $1,000. If the firm\'s tax rate is 37%, what is the component cost of debt for use in the WACC calculation?

5.92%

5.80%

5.67%

5.64%

5.55%

Solution

Greetings,

In calculation of cost of debt for WACC, we need post tax cost of debt. Cost of debt is not the coupon paid by the bond but it is the yield implied by the bond price. In the given case, since the bond is trading at par value, it implies that bond exactly has yield equal to the coupon rate = 9.2%.

So post tax yield = 9.2%*(1.-0.37) = 5.796 or 5.80%