Chapter 10 Home Grades Personalized Reviews Discussion Course Materials The Cost

Question

Chapter 10 Home Grades Personalized Reviews Discussion Course Materials The Cost of Capital Graded Assignment | Read Chapter 10| Back to Assignment Due Sunday 07.01.18 at 11:45 Attempts: 2 2. Cost of debt For which capital component must you make a tax adjustment when calculating a firm's weighted average cost of Keep the Highest: 2/3 Aa Aa capital (WACC)? O Equity O Debt O Preferred stock C Company (WGC) can borrow funds at an interest rate of 10.20% for a period of seven years. Western Gas & Electr Its marginal federal-plus-state tax rate is 45%. WGC's after-tax cost of debt is places) (rounded to two decimal At the present time, Western Gas & Electric Company (WGC) has 20-year noncallable $1,000 that are outstanding. These bonds have a current market price of $1,382.73 per bond, carry a coupon rate of 13%, and distribute annual coupon payments. The c wants to issue new debt, what would be a reasonable estimate for its after-tax cost of debt ( places)? bonds with a face value of ompany incurs a federal-plus-state tax rate of 45%. If wGC O 5.84% ? 4.87% ? 3.90% ? 5.60%

Explanation / Answer

1. Debt.

2. Interest rate = 10.20 % Tax Rate = 45 %

After tax cost of Debt = 10.20 ( 1-0.45)

= 5.61 %

3. Interest rate = 13.00 % Tax Rate = 45 %

After tax cost of Debt = 13.00 ( 1-0.45)

= 7.15 %

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