Problem 22 page 33 (L1V42022)
Two years ago, a company issued $20 million in long-term bonds at par value
with a coupon rate of 9%. The company has decided to issue an additional
$20 million in bonds and expects the new issue to be priced at par value with a
coupon rate of 7%. The company has no other debt outstanding and has a tax
rate of 40%. To compute the company’s weighted average cost of capital, the
appropriate after-tax cost of debt is closest to:
A 4.2%.B 4.8%.C 5.4%.
I used the weighted average cost of both issues to calculate the cost of debt. It’s like 0,59%+0,57%=8%
Then I take after-tax cost: 0,6*8%=4,8%
But the solution of Curriculum used 7% of the second issue as the cost of debt and so the after tax-cost they calculated is 0,6*7%= 4,2%
Who can explain me why we use YTM of expected new issue instead of weighted average of all issued as cost of debt ?