A few years ago the Kennette Company sold a $1,000 par value, noncallable bond t

Question

A few years ago the Kennette Company sold a $1,000 par value, noncallable bond that now has 15 years to maturity and a 5.00% annual coupon that is paid semiannually. The bond currently sells for $920 and the company's tax rate is 40%. What is the component cost of debt for use in the WACC calculation. (Please show your work).
A) 1.74% B) 2.32% C) 3.48% D) 5.81% E) 6.96% A few years ago the Kennette Company sold a $1,000 par value, noncallable bond that now has 15 years to maturity and a 5.00% annual coupon that is paid semiannually. The bond currently sells for $920 and the company's tax rate is 40%. What is the component cost of debt for use in the WACC calculation. (Please show your work).
A) 1.74% B) 2.32% C) 3.48% D) 5.81% E) 6.96%
A) 1.74% B) 2.32% C) 3.48% D) 5.81% E) 6.96%

Explanation / Answer

Face value (FV) $                                  1,000.00 Coupon rate 5.00% Number of compounding periods per year 2 Interest per period (PMT)                                            25.00 Bond price (PV) $                                   (920.00) Number of years to maturity 15 Number of compounding periods till maturity (N) 30 Bond Yield to maturity RATE(NPER,PMT,PV,FV)*2 Bond Yield to maturity 5.81% (Pre-tax cost of debt) Bond Yield to maturity 3.48% (After-tax cost of debt) 5.81%*(1-40%)

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