Burlees Inc.\'s CFO has collected the following information to calculate its WAC
ID: 2745655 • Letter: B
Question
Burlees Inc.'s CFO has collected the following information to calculate its WACC: The company's capital structure consists of 40% debt and 60% common stock. The company has 25-year. 12% annual coupon bonds that have a face value of $1,000 and sell for $1, 252. The company uses the CAPM to calculate the cost of common stock. Currently, the risk-free rate is 5% and the market risk premium is 6%. The company's common stock has a beta of 1.6. The company's tax rate is 40%. What is the company's after-tax cost of debt? 3.74% 4.80% 5.62% 7.20% 8.33%Explanation / Answer
Yield to maturity =[ Interest + (face value -price)/years] /[(face value +price)/2]
= [120+ (1000 - 1252)/25] /[(1000+ 1252)/2]
= [120 + (-252 /25) ] /[2252/2]
= [120 - 10.08] / 1126
= 109.92/1126
= .0976 or 9.76%
After tax cost of debt = 9.76 (1-.40) = 9.76*.6 = 5.86%
correct option is "C" - 5.62% [approx ro 5.86%]
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