Ausel's Furniture Stores has bonds outstanding that mature in 11 years, have a 7 percent coupon, and pay interest annually. These bonds have a face value of $1,000 and a current market price of
$1,002. What is the company's pre-tax cost of debt?

Question

Quizplus · Accepted Answer

To find the pre-tax cost of debt, we need to use the following formula:

Pre-tax cost of debt = (Annual Interest Payment / Current Market Price of Bond) × 100%

Annual Interest Payment = Face Value of Bond × Coupon Rate
Annual Interest Payment = $1,000 × 7% = $70

Current Market Price of Bond = $1,002

Plugging in the values, we get:

Pre-tax cost of debt = ($70 / $1,002) × 100% = 6.97%

Therefore, the best answer is B.

Ausel's Furniture Stores Has Bonds Outstanding That Mature in 11