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9 February, 04:55

Western Gas & Electric Company (WGC) can borrow funds at an interest rate of 12.50% for a period of six years. Its marginal federal-plus-state tax rate is 25%. WGC's after-tax cost of debt is (rounded to two decimal places). At the present time, Western Gas & Electric Company (WGC) has 15-year noncallable bonds with a face value of $1,000 that are outstanding. These bonds have a current market price of $1,329.55 per bond, carry a coupon rate of 12%, 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.)

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  1. 9 February, 05:07
    0
    Consider the following calculations

    Explanation:

    Answer a.

    To calculate the after-tax cost of debt, multiply the before-tax cost of debt by (1 - T).

    Answer b.

    Before-tax Cost of Debt = 12.50%

    After-tax Cost of Debt = 12.50% * (1 - 0.25)

    After-tax Cost of Debt = 9.38%

    Answer c.

    Face Value = $1,000

    Current Price = $1,329.55

    Annual Coupon Rate = 12.00%

    Annual Coupon = 12.00% * $1,000

    Annual Coupon = $120

    Time to Maturity = 15 years

    Let Annual YTM be i%

    $1,329.55 = $120 * PVIFA (i%, 15) + $1,000 * PVIF (i%, 15)

    Using financial calculator:

    N = 15

    PV = - 1329.55

    PMT = 120

    FV = 1000

    I = 8.1213%

    Annual YTM = 8.1213%

    Before-tax Cost of Debt = 8.1213%

    After-tax Cost of Debt = 8.1213% * (1 - 0.25)

    After-tax Cost of Debt = 6.09%
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