the cost of capital: cost of debt. A firms before tax cost of debt,rd, is the intrest

2. 2: The Cost of Capltal: Cost of Debt The Cost of Capital: Cost of Debt A rm's beforetax cost of debt, rd, is the interest rate that the rm must pay on debt. Because interest is tax deductible, the relevant cost of debt used to calculate a rm's WACC is the cost of debt, rd (1 T). The cost of debt is used in calculating the WACC because we are interested in maximizing the value of the rm's stock, and the stock price depends on cash ows. It is important to emphasize that the cost of debt is the interest rate on debt, not debt because our primary concern with the cost of capital is its use in capital budgeting decisions. The rate at which the rm has borrowed in the past is because we need to know the cost of_ capital. For these reasons, the on outstanding debt (which reects current market conditions) is a better measure of the cost of debt than the . The on the company's -term debt is generally used to calculate the cost of debt because more often than not, the capital is being raised to fund -term projects. Quantltatlve Problem: 5 years ago, Barton Industries issued 25-year noncallable, semiannual bonds with a $1,100 face value and a 8% coupon, semiannual payment ($44 payment every 6 months). The bonds currently sell for $845.87. If the rm's marginal tax rate is 40%, what is the rm's aftertax cost of debt? Round your answer to 2 decimal places. Do not round intermediate calculations. %