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 20 years to maturity.  This bond has a 9.25% annual coupon, paid semiannually, sells at a price of $875, and has a par value of $1,000.  If the firm's tax rate is 40%, what is the component cost of debt for use in the WACC calculation? WORK MUST BE SHOWN.

a.<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

5.95%

b.

5.63%

c.

6.47%

d.

6.15%

e.

5.31%

a.<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

5.95%

b.

5.63%

c.

6.47%

d.

6.15%

e.

5.31%

Explanation / Answer

(C) 6.47%

875= 46.25PVIFA(YTM,40)+1000PVIF(YTM,40)

YTM= (2x5.39)= 10.78%

cost of debt for use in the WACC calculation= After tax YTM= 10.78x (1-.4)= 6.468% or rounding will give 6.47%

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