Cost of Debt A firm's before-tax cost of debt, rd, is the interest rate that the firm must pay on -Select- debt. Because interest is tax deductible, the relevant cost of -Select- debt used to calculate a firm's WACC is the -Select- cost of debt, rd (1 – T). The -Select- A 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- Acash 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- Abecause we need to know the cost of -Select- capital. For these reasons, the -Select- A on outstanding debt (which reflects current market conditions) is a better measure of the cost of debt than the -Select- A. The -Select on the company's -Select- 4 -term debt is generally used to calculate the cost of debt because more often than not, the capital is being raised to fund -Select- -term projects. Quantitative Problem: 5 years ago, Barton Industries issued 25-year noncallable, semiannual bonds with a $900 face value and a 12% coupon, semiannual payment ($54 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. % Check My Work (2 remaining)
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