Question

KatyDid Clothes has a $180 million (face value) 20-year bond issue selling for 105 percent of par that carries a coupon rate of 7 percent, paid semiannually.

What would be KatyDid's before-tax component cost of debt? (Round your answer to 2 decimal places.)

Cost of debt

%

Answer 1

Information provided:

Par value= future value= $1,000

Present value= 105*1,000= $1,050

Time= 20 years*2= 40 semi-annual periods

Coupon rate= 7%/2= 3.5%

Coupon payment= 0.035*1,000= $35

The before tax component of debt is calculated by computing the yield to maturity.

Enter the below in a financial calculator to compute the yield to maturity:

FV= 1,000

PV= 1,050

N= 40

PMT= 35

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

The value obtained is 3.27.

Therefore, the before tax component of debt is 3.27*2= 6.55%.

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