Question

Too Young, Inc., has a bond outstanding with a coupon rate of 6.7 percent and semiannual payments. The bond currently sells for $948 and matures in 24 years. The par value is $1,000. What is the company's pretax cost of debt? Multiple Choice 7.75% 7.50% 3.54% 7.29% 7.16%

Multiple Choice

• 7.75%

• 7.50%

• 3.54%

• 7.29%

• 7.16%

Answer 1

Answer:

Face Value = $1,000
Current Price = $948

Annual Coupon Rate = 6.7%
Semiannual Coupon Rate = 3.35%
Semiannual Coupon = 3.35% * $1,000 = $33.50

Time to Maturity = 24 years
Semiannual Period to Maturity = 48

Let semiannual YTM be i%

$948 = $33.5 * PVIFA(i%, 48) + $1,000 * PVIF(i%, 48)

Using financial calculator:
N = 48
PV = -948
PMT = 33.50
FV = 1000

I = 3.58%

Semiannual YTM = 3.58%
Annual YTM = 2 * 3.58%
Annual YTM = 7.16%

Pre-tax Cost of Debt = 7.16%