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18 December, 06:02

Several years ago the Haverford Company sold a $1,000 par value bond that now has 25 years to maturity and an 8.00% annual coupon that is paid quarterly. The bond currently sells for $900.90, and the company's tax rate is 40%. What is the component cost of debt for use in the WACC calculation

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  1. 18 December, 08:47
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    5.4%

    Explanation:

    Several years ago the Haverford Company sold a $1,000 par value bond that now has 25 years to maturity and an 8.00% annual coupon that is paid quarterly. The bond currently sells for $900.90, and the company's tax rate is 40%. What is the component cost of debt for use in the WACC calculation

    Face value of bond = coupon amount / interest rate

    1000 = 80 / 8%

    Therefore 900.9 = 80 / revised interest rate

    multiply both sides by the 'revised interest rate

    revised interest rate x 900.9 = 80

    Hence, revised interest rate = 80 / 900.9 = 9%

    Secondly if the company's tax rate is 40%, the component cost of debt for use in the WACC calculation = kd (1 - t)

    where:

    kd = Cost of debt

    t = tax rate

    Therefore cost of debt for use in the WACC calculation = 9% (1-0.4) = 5.4%
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Home » Business » Several years ago the Haverford Company sold a $1,000 par value bond that now has 25 years to maturity and an 8.00% annual coupon that is paid quarterly. The bond currently sells for $900.90, and the company's tax rate is 40%.
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