Corporate Finance Question

bhatiavai
Posts: 1
Joined: Mon Sep 10, 2012 12:55 am

Corporate Finance Question

Postby bhatiavai » Mon Sep 10, 2012 1:00 am

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 firm’s 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?

A) 9.26%.

B) 6.02%.

C) 5.40%

Not sure what $92 per $100 par means ? I'm assuming to calculate Y, I need to use the given info?
Can anybody help ?

Cheers

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varsha.rajpurohit
Posts: 9
Joined: Thu Sep 06, 2012 10:08 am

Re: Corporate Finance Question

Postby varsha.rajpurohit » Mon Sep 10, 2012 4:23 pm

Hi,

$3million outstanding , $100 par so we have $3million /100 = 30000 bonds
We need to compute YTM. For that we have,
N = 10, PV = -(30000*92) =2760000,PMT = 8*30000=240000,FV = 3million
CPT I/Y = 9.26

After tax component = 9.26(1-35%) = 6.0196 = 6.02

This is my understanding ,
Varsha


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