Question

Micro Spinoffs Inc. issued 10-year debt a year ago at par value with a coupon rate of 7%, paid annually. Today, the debt is selling at $1,110. If the firm’s tax bracket is 35%, what is its percentage cost of debt? Assume a face value of $1,000. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Answer 1

Cost of Debt ={ Coupon Amount + ( Face Value – Price)/n } / {( Face Value + Price)/2}

                           ={ 70+ ( 1000 – 1110)/10 } / {(1000 +1110)/2}

                            = 59 / 1055

                         = 5.59%