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Sagot :
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%.
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