Question 7 1 pts To help finance a major expansion, Castro Chemical Company sold

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Question 7 1 pts 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? O a) 5.95% O b) 5.63 O c) 6.48% O d) 6.15% e) 5.31% Question 8 1 pts Keys Printing plans to issue a $1,000 par value, 20-year noncallable bond with a 7.00% annual coupon, paid semiannually. The company's marginal tax rate is 40.00%, but Congress is considering a change in the corporate tax rate to 32.50%. By how much would the component cost of debt used to calculate the WACC change if the new tax rate was adopted? O a)0.44% b) 0.54% ( c) 0.43% O d) 0.57% ( e) 0.53% O

Explanation / Answer

7)

1 Face value (FV) $                                       1,000 2 Coupon rate 9.25% 3 Number of compounding periods per year                                                    2 1*2/3 Interest per period (PMT) $                                       46.25 Bond price (PV) $                                  (875.00) 4 Number of years to maturity 20 5 = 4*3 Number of compounding periods till maturity (NPER)                                                 40 Bond quoted yield RATE(NPER,PMT,PV,FV)*2 Bond quoted yield 10.79% (Pre-tax cost of debt) Bond quoted yield 6.48% (After-tax cost of debt) 10.79%*(1-40%)

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