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?
The component cost would be the after tax YTM on the existing debt. The YTM is the discount rate that would make the present value of interest and principal equal to the price today.
The interest is paid quarterly = 80/4 = $20, period = 25X4=100 quarters
900.90 = 20 X PVIFA (100, rate) + 1,000 X PVIF (100,rate)
YTM = 9%
The component cost of debt = 9% X (1-0.4) = 5.4%
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