Question

Contrail Air, Inc. is trying to determine its cost of debt. The company has an outstanding debt issue with 19 years to maturity that is quoted at 98.00% percent of face value. The issue makes semiannual payments and has a coupon rate of 9.00% percent. What is the pretax cost of debt?

Answer 1

K = Nx2

Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2

k=1

K =19x2

980 =∑ [(9*1000/200)/(1 + YTM/200)^k]     +   1000/(1 + YTM/200)^19x2

k=1

Pretax debt cost =   9.225%