Kenny Electric Company's noncallable bonds were issued several years ago and now have 20 years to maturity. These bonds have a 9.25% annual coupon, paid semiannually, sells at a price of $1,075, and has a par value of $1,000. If the firm's tax rate is 40%, what is the component cost of debt for use in the WACC calculation

5.08%

Explanation:

This question asks us to calculate the component cost of debt which is used in the WACC calculation if the firm’s tax rate is 40%

To calculate this, we need to know the yield to maturity of the firm. This can be calculated using a formula. In this formula, we will specify that the yield to maturity be represented as the letter Y.

Hence mathematically:

46.25 * [1-(1+Y/2)ˆ-40]/Y/2 + 1000/(1+Y/2)ˆ40 = 1075

Solving this, we get Y = 8.46%

The cost of debt = 8.46% * (1-40%) = 5.08%

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i might look it up later.