The Cost of Capital: Cost of Debt

A firm's before$-$tax cost of debt, $r_d$ is the interest rate that the firm must pay or debt. Because interest is tax deductible, the relevant cost of $$ debt used to calculate a firm's WACC is the cost of debt, $r_d(1-T).$ The after$-$tax $$ cash flows. It is important to emphasize that the cost of debt is the interest rate on $$ debt, not value of the firm's stock, and the stock price depends on $q,$

$q,$ capital. For these reasons, the $$

$$ on outstanding debt $($which reflects current market conditions$)$ is a better because we need to know the cost of

$.$ The on the company's $-$term debt is generally used to calculate the cost of debt because, more measure of the cost of debt than the $$

$$ long often than not, the capital is being raised to fund $-$term projects.

Quantitative Problem: $5$ years ago, Barton Industries issued $25-$year noncallable, semiannual bonds with a $$1,000$ face value and a $6\%$ coupon, semiannual payment $$30$ payment every $6$ months$).$ The bonds currently sell for $$894\mathrm{.}87.$ If the firm's marginal tax rate is $25\%,$ what is the firm's after$-$tax cost of debt? Do not round intermediate calculations. Round your answer to two decimal places.

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