Pacific Travel Group Ltd has determined that its outstanding bonds are currently priced at $104.50 in the marketplace.These bonds will mature in exactly one year's time and pay an annual coupon rate of 10%.The face value of the bonds is $100.This is the only form of debt financing used by the firm.What is the implied cost of Pacific Travel Group's debt?

Question

Quizplus · Accepted Answer

The formula for calculating the implied cost of debt is:
Implied Cost of Debt = (Annual Interest Payment + (Face Value - Current Market Price)) / ((Face value + Current Market Price) / 2)

Annual Interest Payment = 10% x $100 = $10

Implied Cost of Debt = ($10 + ($100 - $104.50)) / (($100 + $104.50) / 2) = $5.26%

Therefore, the implied cost of Pacific Travel Group's debt is 5.26%.

Pacific Travel Group Ltd Has Determined That Its Outstanding Bonds