To help finance a major expansion, Castro Chemical Company sold a noncallable bo

Question

To help finance a major expansion, Castro Chemical Company sold a noncallable bond several years ago that now has 15 years to maturity. This bond has a 8.75% annual coupon, paid semiannually,sells at a price of $1,045 and has a par value of $1,000. If the firms tax rate is 34%, what is the after-tax cost of debt for use in the WACC calculation? Please show work thanks

Explanation / Answer

as annuial copon payment = 8.75% of 1000 = $87.5 => 1045 = 87.5/(1+r)+-----+87.5/(1+r)^15 +1000/(1+r)^15 => r=8.217% after tax cost of debt= 8.217%*(1-0.34) =5.423% so after tax cost of debt=5.423%

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