Ques - A firm has $3 million in outstanding 10-year 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 firms marginal tax rate is 35%. What is the after-tax component cost of debt to be used in the weighted average cost of capital (WACC) calculations? Ans - If the bonds are trading at $92 per $100 par, the required yield is 9.26%, 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%. I failed to understand how did 9.26% came here. I think the correct way to calculate yield would be 8/92 = 8.69%. Can someone explain me where I am wrong? How to arrive at 9.26%? This question is from Session 11, Reading 37.
Not sure if this is correct…level 1 was some time ago for me but i did come up with the 9.26% as follows:
PV=-(3000000/100)*92=- 2760000
PMT=8%*3000000=240000
N=10
FV=3000000
CPT I/Y=9.2609%
As i said…this could be wrong…
Thanks a ton guys…
Really appreciated!