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Q36 Too Young, Inc., has a bond outstanding with a coupon rate of 7.0 percent and...

Q36

Too Young, Inc., has a bond outstanding with a coupon rate of 7.0 percent and annual payments. The bond currently sells for $1919 and matures in 17 years. The par value is $2000. What is the company's pretax cost of debt? Group of answer choices 7.22% 3.51% 7.11% 7.43% 7.68%

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Answer #1

Current Price = 1919

Coupon 7%

Maturity = 17 years

Let's assume the YTM be 6.5%

Value of Bond =

=

= 2101.10576697

Now,

Let's assume the YTM be 8%

Value of Bond =

=

= 1817.56723784

YTM =

= 6.5% + ((2101.10576697 - 1919) / (2101.10576697 - 1919) + (1919 - 1817.56723784)) * (8-6.5)

= 6.5% + (182.10576697 / 283.53852913) * 1.5

= 6.5% + 0.93

= 7.43%

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