WACC - what is the after tax cost of debt?

CFA Level I
#1

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) 6.02%. B) 9.89%. C) 9.26%. D) 5.40%.

#2

A YTM*(1-Tax Rate)

#3

a i agree

#4

thanks. this may sound silly, but to compute ytm in this case, do you use the pv = 92 fv = 100 pmt = 8 n = 1 i/y = ? or do you figure out ytm with the fv = 3 million pv = ? I’ve done a bunch of questions like this one, but this one is tripping me up. Basically I’m confused on computing the YTM. Any suggestions? thanks yancey

#5

pv = -92 fv = 100 pmt = 8 n = 10 i/y = ?

#6

thank you cielito.

#7

yancey never use the amount invested just follow an example with a bond that matures at par with 100 or1000