Maple Industries has 7 percent bonds outstanding that mature in thirteen years. The bonds pay interest semiannually and have a f
ace value of $1,000. Currently, the bonds are selling for $1,021.16. What is the firm's pre-tax cost of debt?A. 6.75%
B. 6.84%
C. 6.91%
D. 7.03%
E. 7.14%
B. 6.84%
C. 6.91%
D. 7.03%
E. 7.14%
1 answer:
Answer:
A. 6.75%
Explanation:
In this question, we use the Rate formula which is shown in the spreadsheet.
The NPER represents the time period.
Given that,
Present value = $1,021.16
Future value or Face value = $1,000
PMT = 1,000 × 7% ÷ 2 = $35
NPER = 13 years × 2 = 26 years
The formula is shown below:
= Rate(NPER,PMT,-PV,FV,type)
The present value come in negative
So, after solving this, the pretax cost of debt is 6.75% (3.38% × 2)
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Answer:
Present value of the security = $1,888.89
Explanation:
The annual dividend of $170 represents a perpetual income stream. The present value of a perpetuity is calculated as follows:
where r =interest rate per annum that would be compounded for each year
Therefore, present value of the security = = $1,888.89