Question

Scite Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 2 years to maturity that is quoted at 106 percent of face value. The issue makes annual payments and has a coupon rate of 8.3 percent annually. What is the firm's pretax cost of debt? (Enter answer in percents.)

Answer 1

Firm's pretax cost of debt

The Firm's pretax cost of debt is the Yield to Maturity (YTM) of the Bond

The Yield to maturity of (YTM) of the Bond is calculated using financial calculator as follows (Normally, the YTM is calculated either using EXCEL Functions or by using Financial Calculator)

Variables	Financial Calculator Keys	Figure
Face Value [$1,000]	FV	1,000
Coupon Amount [$1,000 x 8.30%]	PMT	83
Yield to Maturity [YTM]	1/Y	?
Time to Maturity [2 Years]	N	2
Bond Price [-$1,000 x 106%]	PV	-1,060

We need to set the above figures into the financial calculator to find out the Yield to Maturity of the Bond. After entering the above keys in the financial calculator, we get the yield to maturity (YTM) on the bond = 5.07%

“Hence, the firm's pretax cost of debt will be 5.07%”