Question

XYZ Company has issued 30-year, semi-annual bonds that have a 5 percent coupon. The face amount of each bond at the time of issue was $1,000. These bonds are currently selling for 112% of face value. What is the company's pre-tax cost of debt?

Select one:

a. 3.98 percent

b. 4.42 percent

c. 4.29 percent

d. 3.56 percent

e. 2.45 percent

When calculated corrected, the Weighted Average Cost of Capital results in the company’s net present value.

Select one:

True

False

Answer 1

The pre-tax cost of debt is based on the current yield to maturity of the firm's outstanding bonds.

YTM = C + (F-P) / N / (F + P) / 2

C = Coupon payment = 1000 * 5% * 1/2 = $25

F = Face value = $1000

P = Price = $1000 * 112% = $1120

N=No.of semi annual years = 2*30 = 60

YTM = 25 + (1000-1120) / 60 / (1000 + 1120) / 2

YTM = 0.02145 Semi annual

Annual YTM = 0.02145 * 2 = 0.0429 i.e 4.29%

Answer: C.4.29%

True or False:

Answer : True

WACC results in the company's NPV