Question

To help finance a major expansion, Castro Chemical Company sold a noncallable bond several years ago that now has 20 years to maturity. This bond has a 9.25% annual coupon, paid semiannually, sells at a price of $1,025, and has a par value of $1,000. If the firm's tax rate is 21%, what is the component cost of debt for use in the WACC calculation

Answer 1

The component cost of debt for use in the WACC calculation is approximately 7.32%.

Step-by-step explanation:

The component cost of debt is the cost of using debt in a company's capital structure. It represents the interest rate that the company pays on its debt, which is considered a cost of financing. In this case, the noncallable bond sold by Castro Chemical Company has a 9.25% annual coupon rate, paid semiannually.

To calculate the component cost of debt, we need to consider the after-tax cost of debt. The after-tax cost of debt is calculated by multiplying the coupon rate by (1 - tax rate). In this case, the tax rate is 21%, so the after-tax cost of debt would be 9.25% x (1 - 0.21) = 7.3175%. Therefore, the component cost of debt for use in the WACC calculation would be approximately 7.32%.