Western Gas & Electric Company (WGC) can borrow funds at an interest rate of 7.30% for...

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Western Gas & Electric Company (WGC) can borrow funds at aninterest rate of 7.30% for a period of seven years. Its marginalfederal-plus-state tax rate is 45%. WGC’s after-tax cost of debtis (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 areoutstanding. These bonds have a current market price of $1,136.50per bond, carry a coupon rate of 12%, and distribute annual couponpayments. The company incurs a federal-plus-state tax rate of 45%.If WGC wants to issue new debt, what would be a reasonable estimatefor its after-tax cost of debt (rounded to two decimal places)?(Note: Round your YTM rate to two decimal place.)
1) 6.72%
2) 4.48%
3) 5.60%
4) 6.44%

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3.6 Ratings (279 Votes)

WGCs aftertax cost of debt WGCs aftertax cost of debt Interest Rate x 1 Tax Rate 730 x 1 045 730 x 055 402 Reasonable estimate for the Aftertax cost of Debt Reasonable estimate for the Aftertax cost of Debt is the aftertax Yield to maturity of YTM of the Bond and is calculated using financial calculator as follows See Answer

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Western Gas & Electric Company (WGC) can borrow funds at aninterest rate of 7.30% for a period of seven years. Its marginalfederal-plus-state tax rate is 45%. WGC’s after-tax cost of debtis (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 areoutstanding. These bonds have a current market price of $1,136.50per bond, carry a coupon rate of 12%, and distribute annual couponpayments. The company incurs a federal-plus-state tax rate of 45%.If WGC wants to issue new debt, what would be a reasonable estimatefor its after-tax cost of debt (rounded to two decimal places)?(Note: Round your YTM rate to two decimal place.)1) 6.72%2) 4.48%3) 5.60%4) 6.44%