WACC

CFA Level I
#1

Frnds… i am completely lost with this one… please help… Q. A firm has $3 million in outstanding 10 years bonds, with a fixed rate of 8% (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%. What is the after tax component cost of debt to be used in the WACC calculations. I know the formula for WACC and I am guess the question wants me to calculate the 2nd half of the formula. Is that correct? However, I am still not able to get it. Thanks.

#2

9.26 (1-.35)= 5.85

#3

5.2% or 6.02%… :slight_smile:

#4

wow how did I calculate that wrong 9.26*.65= 6.02 jeeeeeeeeeeeeeeeeeeeeezzzzzzzzzzzzzz I better not do that on the exam strange its the YTM when bonds were issued :slight_smile:

#5

i got 6.01959%

#6

getterdone Wrote: ------------------------------------------------------- > wow how did I calculate that wrong > > 9.26*.65= 6.02 > > jeeeeeeeeeeeeeeeeeeeeezzzzzzzzzzzzzz I better not > do that on the exam > > > strange its the YTM when bonds were issued :slight_smile: Yes. Apparently I got all correct in here but I F$($( up when I do some mock :slight_smile:

#7

getterdone Wrote: ------------------------------------------------------- > 9.26 (1-.35)= 5.85 can you break out the 9.26%? thanks. you solve for YTM first right? then tax that ??

#8

yes sir, n=10 pmt=8 PV=-92 fv=100 CPT I/Y= 9.26%

#9

compute the YTM for bonds and then multipley by (1-tax rate)

#10

i thought after tax cost of debt was = before tax cost of debt * (1 - T) where the before tax cost of debt was = interest expense/total debt ??? need some help here. my first instinct was to do 8% (.65) but the 8% is the coupon rate, not the interest rate

#11

just remember that when computing WACC for debt, the I/Y to use is always the YTM when the bonds were issued. CFAI will surely put the coupon rate and the current market rate in there to try and fool you, but for WACC always use the YTM when the bonds were issued

#12

Thank u all… 6.02% is the correct ans.

#13

getterdone Wrote: ------------------------------------------------------- > just remember that when computing WACC for debt, > the I/Y to use is always the YTM when the bonds > were issued. CFAI will surely put the coupon rate > and the current market rate in there to try and > fool you, but for WACC always use the YTM when the > bonds were issued thanks, friend.

#14

anytime daj

#15

finally got it, 6.01%. geese. thanks, took me long enuff