XYZ company has 10 year bonds issues six years ago. The bonds have a current sel
ID: 2803218 • Letter: X
Question
XYZ company has 10 year bonds issues six years ago. The bonds have a current selling price of 1036.05. They have a quarterly payment of 15.00. The company pays a 35% tax rate. The company's dividends have a growth rate of 2% and their next divident will be 2.72. The current price of the stock is 34.00. The company has no preferred stock and is comprised of 40% debt. Use this information to answer parts A-C.
A) What is the cost of Equity?
B) What is the cost of Debt?
C) What was the intrest rate when the bond was issued?
Explanation / Answer
A. Cost of equity = D1/P0 + g
= 2.72/ 34 + 2%
= 2.08%
B. Cost of debt = YTM of the bonds
Period = 4 years* 4 = 16 quarters
PV = 1036.05
PMT or coupon = $15
YTM = =RATE(16,15,-1036.05,1000) = 1.25% per quarter or 1.25*4 = 5%
Cost of debt = YTM* (1-t)
= 5% * (1-0.35)
= 3.25%
C . Interest rate on bonds = $15*4/ 1000 = 6%
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