Question

Wind Power Systems has semi-annual bonds outstanding with a 5 percent coupon that will mature in 20 years. The face amount of each bond is $1,000. These bonds are currently selling for 114 percent of face value. What is the company's pre-tax cost of debt?

Answer 1

Answer:

the pre tax cost of debt is 3.98%

Explanation:

The computation of the pre tax cost of debt is shown below;

Pre tax cost of debt is

= (Annual interest + (par value - market price) ÷ (number of years) ÷ (par value + market price) ÷ 2

= (0.05) + ($1,000 - $1,140) ÷ (20) ÷ ($1,000 + $1,140) ÷ 2

= 3.98%

Hence, the pre tax cost of debt is 3.98%

We simply applied the above formula so that the correct value could come

And, the same is to be considered