Coeden Co (Dec 12 Adapted) - Kaplan Exam Kit

1. The coupon rate is the interest paid on the nominal value. We usually calculate the cost of debt by calculating the IRR of the after tax interest and redemption paid on the market value. Here, we do not know the market value but the question does tell is that the return to investors (which is pre-tax) is the risk free rate of 4% plus 90 basis points and so is 4.90%. When calculating the market value of the debt, it is investors who determine the market value and so we discount the interest and redemption flows to the investors (which are pre-tax) at the return to investors which is 4.90%. 2. When calculating the WACC we use the post-tax cost of debt and the answer has multiplied 4.9% by 0.8 in the calculation of the WACC.

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