The Bet-r-Bilt Company has a 5-year bond outstanding with a 4.50 percent coupon.
ID: 2708308 • Letter: T
Question
The Bet-r-Bilt Company has a 5-year bond outstanding with a 4.50 percent coupon. Interest payments are paid semi-annually. The face amount of the bond is $1,000. This bond is currently selling for 97 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 4.50 percent coupon. Interest payments are paid semi-annually. The face amount of the bond is $1,000. This bond is currently selling for 97 percent of its face value. What is the company's pre-tax cost of debt?
Explanation / Answer
(F)= 1000
So,Market value(M) = 970
Coupon rate (C)= 4.5/2 = 2.25
Time(T) = 5*2 =10 semiyears
pre-tax cost of debt = [(F*C/100) + (F-M)/T]/{0.6 *M +F*0.4}
=[(1000*4.5/200) + (1000-970)/10]/{0.6 *970 +1000*0.4}
= 0.02597
2.597%
this is semiannual rate....so ans is 2.597*2 = 5.194%
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