Winter wear inc has 6 percent bonds outstanding that mature in 13 years. The bon

Question

Winter wear inc has 6 percent bonds outstanding that mature in 13 years. The bonds pay interest seminannualy and have a face value of 1000. Currently the bonds are selling for 993 each. What is the firms pre-tax cost of debt?

Please explain with calculator inputs. Meaning, N= 26 fv= 1000 ...

2. Hi tech products has 35,000 bonds outstanding that are currently quoted at 102.3 The bonds mature in 11 years and carry a 9 percent annual coupon. What is the firms aftertax cost of debt if the applicable tax rate is 35% .

Also explain including calculator inputs.

Explanation / Answer

Hi,

Please find the answer as follows:

Part A:

N = 26

FV =1000

PV = 993

PMT = 1000*.06*6/12 = 30

Pretax Cost of Debt = Rate(26,30,-993,1000) = 3.04%

Part B:

N = 11

FV =100

PV = 102.3

PMT = 100*.09 = 9

After Tax Cost of Debt = Rate(11,9, -102.3,100) = 8.67%*(1-.35) = 5.64%

Thanks.

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