Problem
The before-tax cost of debt is the interest rate that a firm pays on any new debt financing.
Water and Power Company (WPC) can borrow funds at an interest rate of 12.50% for a period of six years. Its marginal federal-plus-state tax rate is 40%. WPC's after-tax cost of debt is (rounded to two decimal places).
At the present time, Water and Power Company (WPC) has 5-year noncallable bonds with a face value of $1,000 that are outstanding. These bonds have a current market price of $1,050.76 per bond, carry a coupon rate of 10%, and distribute annual coupon payments. The company incurs a federal-plus-state tax rate of 40%. If WPC wants to issue new debt, what would be a reasonable estimate for its after-tax cost of debt (rounded to two decimal places)?