Several years ago the Jakob Company sold a $1,000 par value, noncallable bond th

Question

Several years ago the Jakob Company sold a $1,000 par value, noncallable bond that now has 20 years to maturity and a 7.00% annual coupon that is paid semiannually. The bond currently sells for $925 and the company’s tax rate is 40%. What is the component cost of debt for use in the WACC calculation?  

4.28%

4.46%

4.65%

4.83%

5.03%

Several years ago the Jakob Company sold a $1,000 par value, noncallable bond that now has 20 years to maturity and a 7.00% annual coupon that is paid semiannually. The bond currently sells for $925 and the company’s tax rate is 40%. What is the component cost of debt for use in the WACC calculation?  

4.28%

4.46%

4.65%

4.83%

5.03%

Explanation / Answer

YTM =2*(35+75/40)/(1925/2) = 7.66 %

cost of debt = 7.44*(1-0.4) = 4.60 %

Hence, correct answer is (c)

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