Question

Scite Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 2 years to maturity that is quoted at 109.1 percent of face value. The issue makes annual payments and has a coupon rate of 8.4 percent annually. What is the firm's pretax cost of debt? (Enter answer in percents.)

Answer 1

Information provided:

Face value= future value= $1,000

Coupon rate= 8.4%

Coupon payment= 0.084*1,000= $84

Time= 2 years

Present value= 1,091%*1,000= $1,091

The question is solved by calculating the yield to maturity. The yield to maturity is calculated by entering the below in a financial calculator:

FV= 1,000

PV= -1,091

N= 2

PMT= 84

Press the CPT key and I/Y to compute the yield to maturity.

The value obtained is 3.60.

Therefore, the pre tax cost of debt is 3.60%

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