WC Inc. has a $10 million (face value), 10-year bond issue selling for 99 percent of par that pays an annual coupon of 9 percent. What would be WC's before-tax component cost of debt?
A) 9.00 percent
B) 9.10 percent
C) 9.16 percent
D) 18.32 percent

Question

Quizplus · Accepted Answer

The before-tax component cost of debt can be calculated using the yield to maturity (YTM) formula for bonds, which takes into account the annual coupon payment, the face value, the current price, and the number of years to maturity. In this case, the bond pays an annual coupon of 9% of the face value ($10 million), which equals $900,000. The bond is selling for 99% of par, so its current price is $9.9 million. The bond has a 10-year maturity. Plugging these values into the YTM formula or using a financial calculator, you would find that the YTM, which represents the before-tax cost of debt for WC Inc., is approximately 9.16%.

WC Inc Has a $10 Million (Face Value), 10-Year Bond Issue