To calculate the after-tax cost of debt, multiply the before-tax cost of debt byWestern Gas & Electric Company (WGC) can borrow funds at an interest rate of 11.10% for a period of four years. Itsmarginal federal-plus-state tax rate is 40%. WGC's after-tax cost of debt is(rounded to two decimalplaces)At the present time, Western Gas & Electric Company (WGC) has 20-year noncallable bonds with a face value of$1,000 that are outstanding. These bonds have a current market price of $1,382.73 per bond, carry a coupon rate of13%, and distribute annual coupon payments. The company incurs a federal-plus-state tax rate of 40%. If WGCwants to issue new debt, what would be a reasonable estimate for its after-tax cost of debt (rounded to two decimalplaces)?4.78%5.31%4.25%6.37%

Question
Asked Nov 25, 2019
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To calculate the after-tax cost of debt, multiply the before-tax cost of debt by
Western Gas & Electric Company (WGC) can borrow funds at an interest rate of 11.10% for a period of four years. Its
marginal federal-plus-state tax rate is 40%. WGC's after-tax cost of debt is
(rounded to two decimal
places)
At the present time, Western Gas & Electric Company (WGC) has 20-year noncallable bonds with a face value of
$1,000 that are outstanding. These bonds have a current market price of $1,382.73 per bond, carry a coupon rate of
13%, and distribute annual coupon payments. The company incurs a federal-plus-state tax rate of 40%. 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)?
4.78%
5.31%
4.25%
6.37%
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To calculate the after-tax cost of debt, multiply the before-tax cost of debt by Western Gas & Electric Company (WGC) can borrow funds at an interest rate of 11.10% for a period of four years. Its marginal federal-plus-state tax rate is 40%. WGC's after-tax cost of debt is (rounded to two decimal places) At the present time, Western Gas & Electric Company (WGC) has 20-year noncallable bonds with a face value of $1,000 that are outstanding. These bonds have a current market price of $1,382.73 per bond, carry a coupon rate of 13%, and distribute annual coupon payments. The company incurs a federal-plus-state tax rate of 40%. 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)? 4.78% 5.31% 4.25% 6.37%

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Expert Answer

Step 1

Question 1:

To calculate the after-tax cost of debt, multiply the before-tax cost of debt by “1-Tax Rate” (for example, 4%*(1-10%) = 3.6%).

Step 2

Question 2:

Calculation of After-tax Cost of Debt:

The after-tax cost of debt is 6.66%.

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Aftertax Costof Debt = Pretax Cost of Debt x (1- Tax Rate) [11.10%x (1-40%6)] 0.0666 or6.66%

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Step 3

Question 3:

Calculation of After-tax Cost of Debt:

The after-tax cost of debt is 5.31%.

Excel Spreadsheet:

...
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A В $1,000 $1,382.73 1 Face Value 2 Bond Value 3 Coupon Payment 4 Years to Maturity $130 20 5 Tax Rate 40% 6 Pretax Cost of Debt 8.85% 7 Aftertax Cost of Debt 5.31%

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