Ask Question
16 August, 07:49

At the present time, Western Gas & Electric Company (WGC) has 10-year noncallable bonds with a face value of $1,000 that are outstanding. These bonds have a current market price of $1,278.41 per bond, carry a coupon rate of 11%, and distribute annual coupon payments. The company incurs a federal-plus-state tax rate of 25%. If WGC wants to issue new debt, what would be a reasonable estimate for its after-tax cost of debt (rounded to two decimal places) ? (Note: Round your YTM rate to two decimal place.)

+2
Answers (1)
  1. 16 August, 08:05
    0
    First, find the Pretax cost of debt i. e the YTM.

    You can compute this using a financial calculator with the following inputs;

    FV = 1,000

    N = 10

    PMT = 0.11*1000 = 110

    PV = - 1,278.41

    then CPT I/Y = 7.03%

    Therefore, the pretax cost of debt = 7.03%

    Next, find after-tax cost of debt

    After-tax cost of debt = pretax cost of debt (1-tax)

    = 7.03% (1-0.25)

    = 5.27%
Know the Answer?
Not Sure About the Answer?
Find an answer to your question ✅ “At the present time, Western Gas & Electric Company (WGC) has 10-year noncallable bonds with a face value of $1,000 that are outstanding. ...” in 📘 Business if you're in doubt about the correctness of the answers or there's no answer, then try to use the smart search and find answers to the similar questions.
Search for Other Answers