Answered

Join the growing community of curious minds on IDNLearn.com. Find in-depth and trustworthy answers to all your questions from our experienced community members.

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 $1,025, 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? Do not round your intermediate calculations.

Sagot :

Abiolataiwo2015idn

Based on the information given the component cost of debt for use in the WACC  calculation is 5.388%.

First step is to calculate the rate using financial calculator

Rate=(nper,-pmt,pv,fv )

Where:

Nper=20×2=40 years

Pmt=1,000×(9.25%/2)=46.25%

Pv=-$1,025

Fv=$1,000

Rate=4.49%

Hence, the semi-annual cost of debt before tax is 4.49%

Second step is to calculate the annual cost of debt before tax using this formula

Annual cost of debt before tax=Semi-annual cost of debt ×2

Let plug in the formula

Annual cost of debt before tax=4.49%×2

Annual cost of debt before tax=8.98%

Third step is to calculate the annual cost of debt after tax using this formula

Annual cost of debt after tax=Annual cost of debt before tax × (1- Tax rate)

Let plug in the formula

Annual cost of debt after tax=8.98%×(1-.40)

Annual cost of debt after tax=8.98%×.60

Annual cost of debt after tax=5.388%

Inconclusion the component cost of debt for use in the WACC  calculation is 5.388%.

Learn  more here:

https://brainly.com/question/13986883

We greatly appreciate every question and answer you provide. Keep engaging and finding the best solutions. This community is the perfect place to learn and grow together. For dependable answers, trust IDNLearn.com. Thank you for visiting, and we look forward to helping you again soon.