How did they get 9.26 percent? A firm has $3 million in outstanding 10-year bonds, with a fixed rate of 8 percent (assume annual payments). The bonds trade at a price of $92 per $100 par in the open market. The firm’s marginal tax rate is 35 percent. What is the after-tax component cost of debt to be used in the weighted average cost of capital (WACC) calculations? A) 9.89%. B) 9.26%. C) 5.40%. D) 6.02%. The correct answer was D) 6.02%. If the bonds are trading at $92 per $100 par, the required yield is 9.26 percent, and the market value of the issue is $2.76 million. The equivalent after-tax cost of this financing is: 9.26% (1 – 0.35) = 6.02%.
FV=100 PMT=8 PV=-92 N=10 hit CPT and then I/Y and the answer is 9.26%
Thanks, don’t know why I didn’t see that. Sorry for the bad post.
SConnery Wrote: ------------------------------------------------------- > How did they get 9.26 percent? > > A firm has $3 million in outstanding 10-year > bonds, with a fixed rate of 8 percent (assume > annual payments). The bonds trade at a price of > $92 per $100 par in the open market. The firm’s > marginal tax rate is 35 percent. What is the > after-tax component cost of debt to be used in the > weighted average cost of capital (WACC) > calculations? > A) 9.89%. > B) 9.26%. > C) 5.40%. > D) 6.02%. > > The correct answer was D) 6.02%. > > If the bonds are trading at $92 per $100 par, the > required yield is 9.26 percent, and the market > value of the issue is $2.76 million. > The equivalent after-tax cost of this financing > is: 9.26% (1 – 0.35) = 6.02%. Enter these into the calc: PV=-92 PMT=8 N=10 FV=100 Cpt I/Y --> 9.26%. O ya, who cares if this is an easy question. Its not a bad post. Only way we can pass is through practice and there is no sense in missing the easy ones.