At the present time, Water and Power Company (WPC) has 20-year noncallable bonds with a face value of $1,000 that are outstanding. These bonds have a current market price of $1,181.96 per bond, carry a coupon rate of 13%, and distribute annual coupon payments. The company incurs a federal-plus-state tax rate of 25%. 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)? (Note: Round your YTM rate to two decimal place.) O 9.67% O 8.06% O 9.27%
At the present time, Water and Power Company (WPC) has 20-year noncallable bonds with a face value of $1,000 that are outstanding. These bonds have a current market price of $1,181.96 per bond, carry a coupon rate of 13%, and distribute annual coupon payments. The company incurs a federal-plus-state tax rate of 25%. 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)? (Note: Round your YTM rate to two decimal place.) O 9.67% O 8.06% O 9.27%
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:At the present time, Water and Power Company (WPC) has 20-year noncallable bonds with a face value of $1,000 that are outstanding. These bonds
have a current market price of $1,181.96 per bond, carry a coupon rate of 13%, and distribute annual coupon payments. The company incurs a
federal-plus-state tax rate of 25%. 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)? (Note: Round your YTM rate to two decimal place.)
9.67%
8.06%
9.27%
O 7.25%
Expert Solution
Step 1
Yield to maturity (YTM) is also known as yield till maturity, and it refers to the return of the bond when it is held till maturity. It is the internal rate of return or IRR. It shows the returns earned by the investor and timely payments are made and is reinvested regularly. There are a few more names to it, namely, the book yield, the redemption yield, and so on. Calculation of the yield to maturity is a complicated process.
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