At the present time, western gas & electric company (wgc) has 10-year noncallable bonds with a face value of $1,000 that are outstanding. these bonds have a current market price of $1,278.41 per bond, carry a coupon rate of 11%, and distribute annual coupon payments. the company incurs a federal-plus-state tax rate of 25%. if wgc 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.)

Explanation:

First, find the Pretax cost of debt i.e the YTM.

You can compute this using a financial calculator with the following inputs;

FV = 1,000

N= 10

PMT = 0.11*1000 = 110

PV = -1,278.41

then CPT I/Y = 7.03%

Therefore, the pretax cost of debt = 7.03%

Next, find after-tax cost of debt

After-tax cost of debt = pretax cost of debt (1-tax)

 = 7.03% (1-0.25)

 = 5.27%

answer; institution;

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