a basic schweser bond question...
A firm has $3 million in outstanding 10year bonds, with a fixed rate of 8 percent (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 percent. What is the aftertax component cost of debt to be used in the weighted average cost of capital (WACC) calculations?
Here is the answer:
If the bonds are trading at $92 per $100 par, the required yield is 9.26 percent, and the market value of the issue is $2.76 million.
The equivalent aftertax cost of this financing is: 9.26% (1 – 0.35) = 6.02%.
My questions is…where do you get that required yield of 9.26%?
I know it’s basic…exam is in 2 days and i am losing it
Thanks! |