Cost of debt question - Help!!

[mtwtfss]

Hi guys,

I'm having trouble calculating the the cost of debt in the WACC calculation.

Would someone be able to quickly explain the process for calculating the cost of debt in a question such as this:

12 % Bonds
$100 par value
Maturing in 6 years time
Interest paid annually, and has just been paid
Currently selling for $88.65

Thanks!

[TrueTears]

hey there, to calculate the WACC it is simply an weighted average of the cost of equity and the after tax cost of debt.

Now to calculate the cost of debt from your question, the cost of debt is simply the yield from the bond.

From the info you're given, the coupon payments are $12, with the par value as $100, thus the equation of value is given by:



Then you solve for i which is the cost of debt.

Now to calculate WACC,

Where E = equity market capitalisation, D = Value of Debt, = cost of equity, debt, is the company's corporate tax rate

that we solved above, you can fill in the rest with the info you got