MC Qu. 14-A2 The Bet-r-Bilt Company has a... The Bet-r-Bilt Company has a 5-year
ID: 2623400 • Letter: M
Question
MC Qu. 14-A2 The Bet-r-Bilt Company has a...
The Bet-r-Bilt Company has a 5-year bond outstanding with a 4.25 percent coupon. Interest payments are paid semi-annually. The face amount of the bond is $1,000. This bond is currently selling for 92 percent of its face value. What is the company's pre-tax cost of debt?
The Bet-r-Bilt Company has a 5-year bond outstanding with a 4.25 percent coupon. Interest payments are paid semi-annually. The face amount of the bond is $1,000. This bond is currently selling for 92 percent of its face value. What is the company's pre-tax cost of debt?
Explanation / Answer
Hi,
Please find the detailed answer as follows:
Nper = 5*2 = 10 (indicates the period over which interest payments are made)
PMT = 1000*4.25%/2 = 21.25 (indicates semi-annual interest payment)
FV = 1000 (indicates the face value of bonds)
PV = 1000*92% = 920 (indicates the present value of bonds)
Rate = ? (indicates pre-tax cost of debt)
Pre-tax Cost of Debt = Rate(Nper,PMT,PV,FV)*2 = Rate(10,21.25,-920,1000)*2 = 6.1%
Option C (6.1%) is the correct answer.
Thanks.
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