Company X pays interest to the amount of R1 800 a year on total liabilities of R20 000. It can also issue…

Question

Company X pays interest to the amount of R1 800 a year on total liabilities of R20 000. It can also issue bonds with a YTM of 5%. What will the relevant before tax cost of debt be when calculating that WACC for the company?

ScanSolve AI Tutor · Accepted Answer

Here's the solution for Question 5: Step 1: Identify the relevant cost of debt for WACC. When calculating the Weighted Average Cost of Capital (WACC), the relevant cost of debt is the marginal cost of new debt, which reflects the current market rate for the company's debt. This is typically represented by the Yield to Maturity (YTM) on new bond issues. The historical interest payment on existing liabilities is not used for this purpose. Step 2: State the relevant before-tax cost of debt. The company can issue new bonds with a YTM of 5%. This is the marginal cost of new debt. The relevant before-tax cost of debt is 5%.

Company X pays interest to the amount of R1 800 a year on total liabilities of R20 000. It can also issue bonds with a YTM of 5%. What will the relevant before tax cost of debt be when calculating that WACC for the company?

Answer

Step-by-step solution

Identify the relevant cost of debt for WACC.

State the relevant before-tax cost of debt.

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