The Cost of Capital: Cost of Debt A firm's before-tax cost of debt, rd, is the interest rate that the firm must pay on lect debt. Because interest is tax deductible, the relevant cost of -lect-debt used to calculate a firm's WACC is the -Seltcost of debt, rd (1 T). The lect-cost of debt is used in calculating the WACC because we are interested in maximizing the value of the firm's stock, and the stock price depends on -Select- cash flows. It is important to emphasize that the cost of debt is the interest rate on -Select-debt, not -Select- debt because our primary concern with the cost of capital is its use in capital budgeting decisions. The rate at which the firm has borrowed in the past is Select because we need to know the cost of -Seapital. For these reasons, the -Seleton outstanding debt (which reflects current market conditions) is a better measure of the cost of debt than the Select.The Selecton the company's Selectterm debt is generally used to calculate the cost of debt because more often than not, the capital is being raised to fund Seact -term projects. Quantitative Problem: 5 years ago, Barton Industries issued 25-year noncallable, semiannual bonds with a $1,400 face value and a 5% coupon, semiannual payment ($35 payment every 6 months). The bonds currently sell for $845.87. If the firm's marginal tax rate is 40%, what is the firm's after-tax cost of debt? Round your answer to 2 decimal places. Do not round intermediate calculations. The Cost of Capital: Cost of Debt A firm's before-tax cost of debt, rd, is the interest rate that the firm must pay on lect debt. Because interest is tax deductible, the relevant cost of -lect-debt used to calculate a firm's WACC is the -Seltcost of debt, rd (1 T). The lect-cost of debt is used in calculating the WACC because we are interested in maximizing the value of the firm's stock, and the stock price depends on -Select- cash flows. It is important to emphasize that the cost of debt is the interest rate on -Select-debt, not -Select- debt because our primary concern with the cost of capital is its use in capital budgeting decisions. The rate at which the firm has borrowed in the past is Select because we need to know the cost of -Seapital. For these reasons, the -Seleton outstanding debt (which reflects current market conditions) is a better measure of the cost of debt than the Select.The Selecton the company's Selectterm debt is generally used to calculate the cost of debt because more often than not, the capital is being raised to fund Seact -term projects. Quantitative Problem: 5 years ago, Barton Industries issued 25-year noncallable, semiannual bonds with a $1,400 face value and a 5% coupon, semiannual payment ($35 payment every 6 months). The bonds currently sell for $845.87. If the firm's marginal tax rate is 40%, what is the firm's after-tax cost of debt? Round your answer to 2 decimal places. Do not round intermediate calculations
